Banks' problems still have their foundations in bricks and mortar. And as unemployment rises, housing ills are taking a new turn. US foreclosures in the first half of 2009 totalled 1.5m – in line with forecasts, in spite of widespread moratoria early this year and much-trumpeted loan modification programmes. In fact, with June becoming the fourth consecutive month with more than 300,000 properties receiving notices of foreclosure – a first – the American housing market may again be deteriorating.
That the latest wave is more dispersed at least suggests less feedthrough to house prices from decaying neighbourhoods. The result of economic woes rather than straight-up loopy lending, foreclosures are picking up in states such as Idaho, Utah and Illinois. For banks though, it all points to more properties coming onto their books as so-called other real-estate owned, or OREO. About half of all foreclosures overall return to the banks, says RealtyTrac, which tracks foreclosure filings. For those that reach auction, perhaps more than four-fifths end up with lender after failing to attract interest at the (often unrealistic) reserve price, set by the bank.
What does your local lender turned property magnate do next? That depends. Some regulatory regimes allow more flexibility in valuation than others. Credit Suisse argues that a spike in fourth-quarter OREO losses, followed by a fall in the first three months of this year, was caused by aggressive liquidations by some banks with large OREO portfolios at the end of the year – possibly as regulators baulked at OREO balances creeping towards 20 per cent of tangible common equity.