FDIC: Provisions for Loan Losses Failing to Keep Pace with Delinquencies
The FDIC's Quarterly Banking Survey for the third quarter, released today, covers quite a bit of ground on the mortgage markets; but perhaps the most telling is a section in the report that says loss coverage ratios are the thinnest they've been in nearly 15 years -- in spite of nearly historic increases in loss provisions. Insured banks and thrifts set aside $16.6 billion in loan-loss provisions during the quarter, the most since the second quarter of 1987, and the second-largest quarterly loss provision ever reported by the industry. Third-quarter loss provisions stood at $9.2 billion, 122.4 percent more than the industry set aside in the third quarter of 2006. And yet it wasn't remotely enough -- from the report [emphasis added]:
The industry's reserves for loan and lease losses increased by $5.7 billion (7.0 percent) during the quarter, as insured institutions added $5.9 billion more to reserves in loss provisions than was removed by charge-offs. The growth in reserves was the largest quarterly increase in 18 years and caused the industry's ratio of reserves to total loans and leases to increase for the third quarter in a row. However, the increase in reserves failed to keep pace with the sharp rise in noncurrent loans. As a result, the industry's â€œcoverage ratioâ€? declined from $1.21 in reserves for every $1.00 of noncurrent loans to $1.05 during the quarter â€” the lowest level for the coverage ratio since the third quarter of 1993.Leading the charge in asset quality deterioration was -- you guessed it -- mortgages. Noncurrent residential mortgage loans increased by $7.5 billion, or 27.2 percent, while noncurrent home equity lines of credit rose by $783 million, or 27.4 percent. At the end of September, the FDIC said that the total amount of all loans and leases that were noncurrent among insured institutions totaled $83 billion, the highest level since the third quarter of 1992. FDIC chairman Sheila Bair said that the current conditions in the residential mortgage market underline the urgency of finding solutions to the looming threat posed by the scheduled upward re-pricing of many adjustable-rate mortgage loans to subprime borrowers. "I am hopeful that lenders and servicers will see that it is in their own best interest, as well as the interests of their investors and, of course, the many homeowners who have remained current on their mortgage payments, that they provide some relief from interest-rate resets," she said. For more information, visit http://www.fdic.gov.