Chris Whalen Of Institutional Risk Analytics….Look Out Below For Banks And Real Estate

Posted By on June 1, 2011

Chris is one of the top real estate and banking minds for institutional money.  Chris Whalen of Institutional Risk Analytics: If we do not see a meaningful recovery in home prices by the end of the year, we may need to contemplate impairment charges on first liens owned by banks and wholesale write-downs of second lien exposures. This implies solvency issues for BAC, WFC, JPM and C, and big losses for the U.S. government and private investors.” 

Real estate prices have now fallen more than they did during the Great Depression. “On that occasion, the peak in prices was not regained until 19 years after they first fell,” notes Paul Dales at Capital Economics.

So what about the banks? Sure, they took huge write-downs already, but there is clearly more pain to come, especially given that this report out today is actually a three month running average based on home sale closings in March, so really you could say the whole thing is based on sales contracts signed around six months ago. We’ve seen considerably more housing weakness since then.

“All will have to take new markdowns if these price pressures continue, which everything points to the fact that it will,” says Peter Boockvar at Miller Tabak. “Bank balance sheets are still cluttered with mortgage loans, and they are still being asked to take back bad mortgages from those that bought them, like Fannie Mae and Freddie Mac, so the lower home prices go, the risk rises that another round of balance sheet write downs may be necessary.”

And speaking of Fannie and Freddie (and I’ll throw in private label and FHA), when you consider the enormous volume of bank-owned (REO) inventory of foreclosed properties they’re holding….

…you have to also consider what a drop in home values means to all that. The chart we have shows all the REO without the banks included, as we don’t know that, but if you take additional data from RealtyTrac showing total REO inventory at 872,990 in May and multiply it by the latest median home price from the National Association of Realtors ($163,700 in April), you get around $142.9 billion in value at risk minus at least a 25 percent discount because it’s a foreclosure already. “With each subsequent dip in home prices, the portfolio is worth less and the banks will suffer increasing losses,” notes RealtyTrac’s Rick Sharga.It’s impossible to say what the bank losses are right now, especially when you have to add in more potential put backs, where Fannie and Freddie force the banks to buy back bad loans. All we know is that the more home prices fall, the more the banks stand to suffer, and we all know what happened the last time they suffered.

“If we do not see a meaningful recovery in home prices by the end of the year, we may need to contemplate impairment charges on first liens owned by banks and wholesale write-downs of second lien exposures. This implies solvency issues for BAC, WFC, JPM and C, and big losses for the U.S. government and private investors,” says Chris Whalen of Institutional Risk Analytics.

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