More write-downs ahead for banks

Be afraid. Be very afraid.

I know this is getting tedious but, I can’t help it.

Today’s Wall Street Journal included a story about how home mortgage refinancing volumes aren’t as high as expected, even though interest rates are low and being kept low by the Federal Reserve.  The premise of the story is:  there’s money being left on the table by borrowers who aren’t refinancing.

But buried in the article is a reason to continue to be very concerned about bank balance sheets and the write-offs yet to come.

John Albright, a retired Navy officer in Manassas, Va., hasn’t been able to refinance because the value of his home has plunged. He figures its market value is now around $275,000, but he and his wife still owe more than $500,000 on their mortgage.

Their refinance application was turned down last year because they lacked equity in the home. He says his lender told him he could refinance only if he could come up with about $200,000 to pay down his mortgage. So they are stuck with an interest rate of about 6.5% at a time when his wife’s income has declined. “We’re going from paycheck to paycheck, but what can you do?” Mr. Albright says.

Here we have a couple who appears to be still paying on their mortgage, but has no hope of refinancing into a lower rate because the amount they owe exceeds the market value of their home by a huge amount.  The Albrights are stuck in this house until and unless one of two things happen:  either home prices skyrocket or they convince their bank to reduce the principal balance of the mortgages to something closer to the current market price, and they might only do this in a “short sale” if  the Albrights want to move.

This is obviously bad news for the Albrights, but it’s equally bad for their lender.  This mortgage is likely still being shown on the banks books as “current” since the Albrights appear based on the article to be making payments.  But if you were to mark this loan today, you’d have to say that there’s an embedded loss for the lender of $225,000–the difference between the current mortgage and the market value.  I’m feel safe in saying that whoever holds this paper hasn’t recognized this loss yet simply because the loan is still paying.

All of which is a long way of saying that the problems in residential real estate are starting to feel “perpetual” (even though they won’t be, it just feels like it), and there are more losses buried on banks’ balance sheets (as if we need to be reminded of that!).

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