Tags: Whalen | Bank | Crisis | foreclosure | christopher

Whalen: Foreclosure Crisis Will Collapse Some Big Banks

Friday, 22 Oct 2010 12:17 PM

Institutional Risk Analytics' Chris Whalen says nonpayment by mortgage borrowers and mounting foreclosure backlogs could collapse some of the largest U.S. banks in 2011.

"The improvement in loan-default rates is a mirage,” Whalen said during a recent presentation to the American Enterprise Institute, adding that banks’ subprime-mortgage losses have been hidden by bad accounting.

“The use of loan modification to make bad credits appear ‘current’ is an economic fraud perpetrated by Washington that is already becoming apparent via foreclosure moratoria,” says Whalen.

Moreover, the U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults, and we are actually less than one-quarter of the way through mortgage foreclosures.

“The third stage of the banking crisis involves degradation of bank operating efficiency as restructuring accelerates, expenses rise and lenders involuntarily become nonoperating REITs,” says Whalen.

According to Whalen, measured in dollars, the net interest margin of the banking industry has been cut by one-third during the past three years due to the Fed’s zero interest-rate policy.

“Banks are literally dying from lack of yield on assets due to the Fed’s ZIRP,” Whalen observes.

Bloomberg reports that shoddy mortgage lending has led bankers into a two-front war, pitting them against U.S. homeowners challenging the right to foreclose and mortgage-bond investors demanding refunds that could approach $200 billion.

The biggest risks for banks may be loans packaged into mortgage-backed securities during the housing bubble, of which $1.3 trillion remain.

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Institutional Risk Analytics' Chris Whalen says nonpayment by mortgage borrowers and mounting foreclosure backlogs could collapse some of the largest U.S. banks in 2011. The improvement in loan-default rates is a mirage, Whalen said during a recent presentation to the...
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2010-17-22
Friday, 22 Oct 2010 12:17 PM
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