The Terrifying, No Good, Very Bad News for the Banking Sector

I'm not much of an "I told you so" type of guy, but I can't help it because in this case I told you so at least a handful of times.

I told you so
Data released yesterday by credit agency TransUnion showed that the delinquency rate of homeowners who are more than 60 days behind on their mortgages rose for the first time since late 2009. The 6.44% delinquency rate for the June to September period marks a very large jump from the 5.88% rate reported in the year-ago period and the 5.82% reported in the second quarter.

While TransUnion wouldn't comment on the specifics about why the delinquency rate is rising, Tim Martin, group vice president of U.S. Housing for TransUnion, attributed it to a melting pot of the U.S. credit downgrade, U.S. and European debt crises, and the volatile U.S. stock market.

Seriously, I did tell you
I, however, have a completely different set of reasons why mortgage delinquencies are once again on the rise.

First, a heavy slug of undocumented income, or Alt-A, loans are scheduled to have their mortgage rates reset in 2011. There were considerably more Alt-A loans underwritten than subprime loans three years ago, so even with banks better capitalized than they were three years ago this trend is very concerning. It's still uncertain if homeowners can meet their debt obligations, especially in an environment where unemployment remains steady at 9%.

With data from most major banks being downplayed, it may have slipped under the radar, but September saw rising credit card delinquencies from nearly all major U.S. financial institutions including JPMorgan Chase (NYSE: JPM  ) , American Express (NYSE: AXP  ) , Discover Financial (NYSE: DFS  ) , and Bank of America (NYSE: BAC  ) . I'd be especially concerned for a company like Capital One Financial (NYSE: COF  ) , which is intricately tied to the credit card markets, more so than any other large bank. A degradation in the creditworthiness of its customers could easily affect that company's bottom line.

As much as we don't want to make a big deal about housing prices, the S&P Case-Shiller housing price index, which is down 5.9% year over year, continues to tell us a tale of woe. With little incentive to continue making payments on drastically underwater homes, some homeowners are still choosing to walk away rather than deal with the arduous process of renegotiating their loans.

Even refinancing and mortgage activity has been spotty at best despite rates that trended near 60-year lows. A recent 30-basis-point surge in 30-year mortgage rates was enough to send new mortgage applications tumbling by nearly 15%. Consumers are becoming hypercritical of interest rate moves, which could bode poorly for banks.

Finally, data from the homebuilders themselves speak to the level of pessimism built into the sector. Neither KB Home (NYSE: KBH  ) nor Beazer Homes (NYSE: BZH  ) has been able to turn a full-year profit since 2006, and much of the sector remains underwater without the assistance of the U.S. government.

Cue the fire?
Consumer confidence is dancing around two-and-a-half-year lows, credit card and mortgage delinquencies are rising, and housing prices are falling. Now all we need is Nero to play the fiddle and the scenario is complete.

Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Bank of America and JPMorgan Chase. Motley Fool newsletter services have recommended writing a covered strangle position on American Express. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that has no shame when it comes to making analogies involving Rome.


Read/Post Comments (6) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2011, at 5:45 PM, robwg wrote:

    "some homeowners are still choosing to walk away rather than deal with the arduous process of renegotiating their loans."

    Some (many apparently) lenders are still refusing to even discuss short sales, and anyone with less than stellar credit has no hope of a refi. Maybe if the lenders were more realistic about sharing in the losses people wouldn't walk. They're not, so end up with a repo that is worth far less than they might have gotten with a short sale. The greed and stupidity being shown by banks in general continues to be astounding.

  • Report this Comment On November 09, 2011, at 6:24 PM, Doris411 wrote:

    Your sub-heading, "Cue the fire", gave me a chill. Has anyone seen any recent statistics on home fires? Especially possible arson?

  • Report this Comment On November 09, 2011, at 6:29 PM, xetn wrote:

    As long as the banks do not have to comply with mark to market, they can list their REOs at full loan value. If they were compelled to comply with FASB, they would all be underwater. And not just for residential. There are huge losses in commercial RE as well.

  • Report this Comment On November 09, 2011, at 7:35 PM, rgif102478 wrote:

    It's a wonder City Bank is not on this list, with

    all the Peggy's they have. I for one will not take

    a gift from them, something they paid 25% on the

    dollar at a bargan basement store.

    I might take a gas card but I bet they will not

    have one, so It's good bye to them by consumer

    request. Bo b Gifford

  • Report this Comment On November 10, 2011, at 12:09 AM, Notfooled1 wrote:

    Have you checked this writer's record as a stock picker? Sad to say, he is a LOSER so it is difficult to believe anything he says.

  • Report this Comment On November 10, 2011, at 2:55 AM, grain wrote:

    @ Notfooled1. I did. His CAPS rating is 99.99; his

    Player Rank is 10 out of 73762. As in top 10. That's quite impressive.

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