Double-dip in US Housing prices Could Cost Banks an Extra $70-$80 billion in Losses
Standard & Poor’s says US banks could suffer an additional $70 to $80 billion or more in loan losses if US housing prices fall by 10% more than currently envisaged by the end of next year.
Excerpts from What Could A Double-Dip In Housing Mean For The U.S. Banking Sector’s Earnings?
Given homebuilding’s extended malaise, we have examined the impact on banks of a hypothetical double-dip in housing between now and December of 2012. We assume that in such a scenario house price declines would accelerate to 15% rather than the 5% envisaged in our baseline scenario.
In the 14 quarters between the second quarter of 2007 and the fourth quarter of 2010, U.S. banks cumulatively racked up $149 billion in residential mortgage-related loan charge-offs.
If a double-dip in housing of the magnitude we’ve imagined were to ensue over the next few quarters, rising foreclosures and delinquencies, combined with a higher volume of home modifications and redefaults, would potentially drive credit losses higher by $30 billion to $35 billion.
This would result in a five-year cumulative credit loss rate of 8.5% to 9% range in banks’ housing portfolios, approximately 0.5 to 1 percentage point higher than in our baseline forecast. Separately, a buildup of representation and warranty expense might increase costs by an estimated $33 billion. Another $6 billion to $12 billion in fee income might be foregone due to fewer originations.
Overall, we estimate that total cumulative loan losses to the U.S. banking sector from these risks could increase by $70 billion to $80 billion relative to a more benign baseline.
At $70 billion to $80 billion, total losses in a double-dip scenario would equal approximately 30% to 35% of projected pretax operating income before any provision for losses.
Our double-dip scenario doesn’t factor in the additional costs banks may incur related to the recent foreclosure disruptions, including monetary penalties and the cost of complying with new rules governing servicing operations. We expect these costs – which some external estimates have put at $5 billion-plus — to occur in both the baseline and alternative scenarios. Nor do we factor in the losses that could potentially materialize via unrealized losses in banks’ securities portfolios.
If in fact the assumptions in our double-dip scenario were to materialize, we would envisage downward pressure on bank ratings.
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May 31st, 2011 at 9:18 am
[...] is not good for US bank, among others. As noted on ResearchRecap last week, S&P calculates that a double dip in home prices could cost US banks an additional $70-80 [...]