Banks feel market lull

Over the past year the housing market has definitely seen a decline from its “boom” of the previous five plus years.

This slowing or “cooling” of the market has been affecting many business entities. The nation’s banks are no exception.

Lower mortgage originations and an increasing number of payment defaults have led banks to finally be concerned about their future financial endeavors.

The September 1, 2006 article, “Housing Chill Begins to Pinch Nation's Banks,” located in The Wall Street Journal and written by Robin Sidel, goes into further detail about the cooling market’s effects.

“Although real-estate downturns typically trigger concerns about rising delinquencies and defaults on existing mortgages, the more pressing worry in the industry right now is that a slowdown in demand for new loans will cut into earnings that have been exceptionally strong.”

The decline in loan demand, which results in fewer loan originations, are worrying banks because they are already battling with difficult economic circumstances such as a high and unsatisfactory interest-rate environment, a saturated credit-card market and failing the realistic prospective of lower consumer credit scores.

“‘Any wiggle in the real-estate business has a significant impact on banking because that's where the growth has been coming from,’ says Richard Bove, an analyst at Punk, Ziegel & Co.”

“The Commerce Department last week reported that sales of new single-family homes fell 4.3% in July to a seasonally adjusted annual rate of 1.1 million. The National Association of Realtors, meanwhile, said that existing-home sales fell in July to the lowest level since January 2004.”

Banks are now beginning to warn investors about the damaging affects the current real estate market is having on them.

“ FirstFed Financial Corp., a Santa Monica, Calif., bank with a large mortgage business, said in a securities filing Monday that its mortgage originations were down 47% in July from year-earlier levels. The next day, First Horizon National Corp., a Memphis, Tenn., bank that sells home loans across the country, said it expects mortgage originations to fall by $1 billion in the third quarter due to a falloff in applications.”

A direct result of the slowing market is a significant decline in home equity loan originations. During the housing boom, banks were pushing these loans and actually advertising how you can use your equity for vacations and big-screen televisions. At that time, a person’s equity was almost doubled each year, now it is rising very slowly.

This is alarming because overall real estate transactions constitute a large bulk of banks’ finances.

“Real estate, including mortgages, home-equity loans and commercial loans, represented a record 33.5% of the U.S. banking industry's $9.298 trillion in assets in July, according to the Federal Reserve. The numbers represent the highest level in the Fed's database going back to 1973.”

But the majority of Wall Street analysts contest that banks do not have much to fear and that loan originations will begin to climb back up any day, especially if unemployment rates stay low and the economy continues to be above par, even despite high gasoline prices.

The real estate lull is producing mixed results. Regardless of what people think will happen in the future months, the statistics show that banks are starting to feel the market woes.

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