Housing Chill Begins to Pinch Nation's Banks
Slower Demand for New Loans May Hit String of Strong Profits;
Few Default Concerns -- So Far
By ROBIN SIDEL
September 1, 2006
The cooling housing market is starting to pinch the nation's banks, which are more exposed to real estate than ever -- and it comes at a time when some of their other key businesses already are being squeezed.
Although real-estate downturns typically trigger concerns about rising delinquencies and defaults on existing mortgages, the more pressing worry in the industry right now is that a slowdown in demand for new loans will cut into earnings that have been exceptionally strong.
That is significant because financial institutions already are grappling with several issues. They include a difficult interest-rate environment, competition for traditional banking customers, a saturated credit-card market and expectations that strong consumer-credit quality will soon show signs of weakening.
"Any wiggle in the real-estate business has a significant impact on banking because that's where the growth has been coming from," says Richard Bove, an analyst at Punk, Ziegel & Co.
The Commerce Department last week reported that sales of new single-family homes fell 4.3% in July to a seasonally adjusted annual rate of 1.1 million. The National Association of Realtors, meanwhile, said that existing-home sales fell in July to the lowest level since January 2004.
Indeed, banks have begun to warn investors that the housing slowdown is starting to hurt their business. FirstFed Financial Corp., a Santa Monica, Calif., bank with a large mortgage business, said in a securities filing Monday that its mortgage originations were down 47% in July from year-earlier levels. The next day, First Horizon National Corp., a Memphis, Tenn., bank that sells home loans across the country, said it expects mortgage originations to fall by $1 billion in the third quarter due to a falloff in applications. And Punk Ziegel's Mr. Bove last week cut his rating on Salt Lake City-based Zions Bancorp to a "hold" from a "buy" due to views that the bank, which provides loans to home builders, will experience lower volumes as construction slows and land values decline.
Banks have ridden the real-estate boom over the past five years by pitching traditional loans, newfangled mortgages and home-equity loans that can be used to pay off credit-card bills or fund a new plasma-screen television.
While the banks reduce their exposure to these loans by selling some of them into secondary markets, real estate still amounts to a chunk of their assets.
As a result, real estate, including mortgages, home-equity loans and commercial loans, represented a record 33.5% of the U.S. banking industry's $9.298 trillion in assets in July, according to the Federal Reserve. The numbers represent the highest level in the Fed's database going back to 1973.
Although the nation's biggest banks have sprawling operations, their share of the mortgage market also has grown during the boom, whether through acquisitions or internal expansion. At J.P. Morgan Chase & Co., the nation's third-largest bank as measured by assets and market value, real estate represents about 13% of the bank's assets. That is a slight increase from 2003, when real estate was less than 10% of Bank One Corp.'s assets and about 11% of J.P. Morgan's assets. J.P. Morgan acquired Bank One in 2004.
At Bank of America Corp., the nation's second-largest bank, behind Citigroup Inc., home-equity loans represented 5% of assets as of June 30, up from 4% at the end of 2001.
"Five years ago, you would have said that mortgage risk was pretty [small] for the banking industry as a whole, and for the large banks in particular, but it is hard to say that today," says Frederick Cannon, an analyst at Keefe, Bruyette & Woods Inc., which specializes in the financial-services industry.
So far, bank executives and Wall Street analysts are expressing little concern about the prospects for a big increase in mortgage delinquencies or defaults, particularly if unemployment stays low and the economy shows signs of strength despite high gasoline prices. They say that credit-scoring models are far more sophisticated today than they were in previous housing cycles. Delinquencies stood at 4.41% in the first three months of the year, up from 4.31% in the year-earlier period, according to data released by the Mortgage Bankers Association, a trade group, in June.
Still, the mortgage market is filled with new types of loans that were far less prevalent -- or didn't exist at all -- in previous housing downturns. These products, such as interest-only loans or adjustable-rate mortgages in which the borrower can choose from multiple payment options, are viewed as more risky than traditional fixed-rate mortgages. The trade association says that fewer than 25% of all mortgages are adjustable-rate loans.
"The oldest saw in banking is that bad loans are made in good times," Keefe's Mr. Cannon says. "We have never really faced a weakening housing market with the structure of the mortgage market as it is today."
Slower Demand for New Loans May Hit String of Strong Profits;
Few Default Concerns -- So Far
By ROBIN SIDEL
September 1, 2006
The cooling housing market is starting to pinch the nation's banks, which are more exposed to real estate than ever -- and it comes at a time when some of their other key businesses already are being squeezed.
Although real-estate downturns typically trigger concerns about rising delinquencies and defaults on existing mortgages, the more pressing worry in the industry right now is that a slowdown in demand for new loans will cut into earnings that have been exceptionally strong.
That is significant because financial institutions already are grappling with several issues. They include a difficult interest-rate environment, competition for traditional banking customers, a saturated credit-card market and expectations that strong consumer-credit quality will soon show signs of weakening.
"Any wiggle in the real-estate business has a significant impact on banking because that's where the growth has been coming from," says Richard Bove, an analyst at Punk, Ziegel & Co.
The Commerce Department last week reported that sales of new single-family homes fell 4.3% in July to a seasonally adjusted annual rate of 1.1 million. The National Association of Realtors, meanwhile, said that existing-home sales fell in July to the lowest level since January 2004.
Indeed, banks have begun to warn investors that the housing slowdown is starting to hurt their business. FirstFed Financial Corp., a Santa Monica, Calif., bank with a large mortgage business, said in a securities filing Monday that its mortgage originations were down 47% in July from year-earlier levels. The next day, First Horizon National Corp., a Memphis, Tenn., bank that sells home loans across the country, said it expects mortgage originations to fall by $1 billion in the third quarter due to a falloff in applications. And Punk Ziegel's Mr. Bove last week cut his rating on Salt Lake City-based Zions Bancorp to a "hold" from a "buy" due to views that the bank, which provides loans to home builders, will experience lower volumes as construction slows and land values decline.
Banks have ridden the real-estate boom over the past five years by pitching traditional loans, newfangled mortgages and home-equity loans that can be used to pay off credit-card bills or fund a new plasma-screen television.
While the banks reduce their exposure to these loans by selling some of them into secondary markets, real estate still amounts to a chunk of their assets.
As a result, real estate, including mortgages, home-equity loans and commercial loans, represented a record 33.5% of the U.S. banking industry's $9.298 trillion in assets in July, according to the Federal Reserve. The numbers represent the highest level in the Fed's database going back to 1973.
Although the nation's biggest banks have sprawling operations, their share of the mortgage market also has grown during the boom, whether through acquisitions or internal expansion. At J.P. Morgan Chase & Co., the nation's third-largest bank as measured by assets and market value, real estate represents about 13% of the bank's assets. That is a slight increase from 2003, when real estate was less than 10% of Bank One Corp.'s assets and about 11% of J.P. Morgan's assets. J.P. Morgan acquired Bank One in 2004.
At Bank of America Corp., the nation's second-largest bank, behind Citigroup Inc., home-equity loans represented 5% of assets as of June 30, up from 4% at the end of 2001.
"Five years ago, you would have said that mortgage risk was pretty [small] for the banking industry as a whole, and for the large banks in particular, but it is hard to say that today," says Frederick Cannon, an analyst at Keefe, Bruyette & Woods Inc., which specializes in the financial-services industry.
So far, bank executives and Wall Street analysts are expressing little concern about the prospects for a big increase in mortgage delinquencies or defaults, particularly if unemployment stays low and the economy shows signs of strength despite high gasoline prices. They say that credit-scoring models are far more sophisticated today than they were in previous housing cycles. Delinquencies stood at 4.41% in the first three months of the year, up from 4.31% in the year-earlier period, according to data released by the Mortgage Bankers Association, a trade group, in June.
Still, the mortgage market is filled with new types of loans that were far less prevalent -- or didn't exist at all -- in previous housing downturns. These products, such as interest-only loans or adjustable-rate mortgages in which the borrower can choose from multiple payment options, are viewed as more risky than traditional fixed-rate mortgages. The trade association says that fewer than 25% of all mortgages are adjustable-rate loans.
"The oldest saw in banking is that bad loans are made in good times," Keefe's Mr. Cannon says. "We have never really faced a weakening housing market with the structure of the mortgage market as it is today."
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