February 2010 Comment:
The Associated Press two days ago reported the number of banks on the FDIC's confidential "problem" list vaulted to 702, up from 552 in the third quarter. It further said: Delinquencies on commercial real estate loans remain a source of trouble. A wave of defaults on such loans could cause more banks to fail, FDIC officials and experts say. Last year, 140 federally insured institutions failed and were shut down by regulators. The failures pushed the deposit insurance fund into the red last year. It was $20.9 billion in deficit as of Dec. 31, the FDIC reported. Already this year 20 banks have failed...

An editorial published the same day in the LA Times summarized the bleak condition of residential mortgages: Three years have passed since the housing bubble burst, and yet the number of mortgage defaults and foreclosures continues to increase. RealtyTrac tallied up a record 2.8 million homes that received at least one foreclosure notice last year, and predicted that 4.5 million would go into foreclosure this year. If so, that would be nearly one out of every 20 homes...

Freddie Mac warns 'large wave of foreclosures' ahead
 
(by Alan Zibel, Associated Press; Feb 24, 2010) -- Freddie Mac lost almost $26 billion last year, ominous news for taxpayers, who are footing the bill to rescue the mortgage finance company and its sibling, Fannie Mae.

Freddie Mac, which has lost almost $80 billion since the housing crisis started in 2007, is bracing for more pain... a record 4 percent of its borrowers are at least three months behind on their payments and facing foreclosure.

Its chief executive, Charles Haldeman, warned Wednesday of a "potential large wave of foreclosures" still to come.

This is a major problem for the federal government, which seized control of Freddie and Fannie in September 2008. The two companies have already siphoned $111 billion from the government to stay afloat. That number is expected to hit $188 billion by fall 2011.

Underscoring the market's weakness, the Commerce Department said Wednesday that sales of new homes unexpectedly plunged 11 percent from December to January to the lowest level on record.

Bob Jones, chairman of the National Association of Home Builders, said of the record low in sales, "This disappointing report highlights just how fragile the economic and housing recovery is right now, and the uncertainties that continue to weigh on consumers, particularly with regard to concerns about job security."

And, as if the residential mortgage situation weren't enough already, the rising tide of the commercial default rate surely makes for a perfect financial storm...

Commercial mortgage default rate in U.S. more than doubles
 
(by Dan Levy and David Henry, Bloomberg BusinessWeek; Feb 24, 2010) -- The default rate for commercial property mortgages held by U.S. banks more than doubled in the fourth quarter and may reach a peak of 5.4 percent at the end of next year, according to Real Capital Analytics Inc...

"The level of distress continues to rise irrespective of improving economic trends," Sam Chandan, Real Capital's global chief economist, said in a telephone interview.

The U.S. jobless rate declined to 9.7 percent in January from 10 percent in December, after hitting a 26-year high of 10.1 percent in October. Unemployment and tighter credit are hurting commercial property values, which fell 29 percent in December from a year earlier and are down 41 percent from the October 2007 peak...

"With the concentration of commercial mortgages in small and community banks, there is a potential spillover that will impinge on their ability to make loans to small businesses and families," Chandan said.

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