Are Loan Default Problems Getting Worse?
Posted on October 21, 2007 in the Investing, Money category
.Financial Times this weekend asked whether the U.S. loan problem was getting worse. It is a good question as it appears that the sub-prime mortgage problems are spilling over to other sectors of the economy.
“What started out merely as a subprime problem has expanded more broadly in the mortgage space and problems are getting worse at a faster pace than many had expected,” said Michael Mayo, Deutsche Bank analyst.
On top of this, there is an uptick in auto loan problems, which may or may not be seasonal, and there is more body language from the banks that the state of the consumer was somewhat less strong [than thought].”
he spectra of defaults in other financial markets are causing banks to build up their reserves. Estimates are that U.S. banks have raised reserves for loan losses by at least $6bn over the second quarter. Banks are adding reserves not just for defaults on mortgages, but also on home equity loans, car loans and credit cards.
ick Bove, analyst at Punk Ziegel, said bank earnings indicated “there are problems with consumer debt that extend beyond the well-known issues in the real estate markets. Auto loans are clearly a new area of concern”. At Wachovia, the fourth largest US bank by assets, credit loss provisions more than doubled from the second quarter to $408m.
any investors thought that the sub-prime credit loan problems were behind them. As problem loans appear in the non-mortgage markets, banks will be forced to increase write-offs and reserves. Both tactics will improve the financial stability of banks, but will have a negative impact on bank’s earnings. For a Wall Street that is already skittish, continued earning woes from banks could result in lower overall stock prices.
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