The Daily Show recently offered this commentary on the current profitability of large banks:
The gist of the Daily Show’s segment is that 4 banks profited every trading day during the last quarter basically by borrowing short term from the Federal Reserve at almost zero interest and lending the same money back to the government at 3.5% by purchasing 10 year Treasury bonds. They are the profit taking middlemen in a washing machine to fund large deficits to stimulate the economy. Note that the Federal Reserve and Treasury are aiding the banks in this arrangement. The public animosity towards the bank profiteers no doubt played a part in passing more vigorous reforms to financial regulations.
While on the one hand bank earnings in 2010 have been more than 4 times the earnings of the S&P 500, banks also have about $1 trillion in second liens on their books, with more than $400 billion on the books of the 4 largest banks. On the financial blog Rortybomb, Mike Konczal reports that the Bank Stress Test adverse scenario documents expected losses of 13-14% on these second liens (so banks value the second lien assets at 86% of their face value). He asserts that the current housing market might see real losses of 40-60%, considering that most of the second liens are worthless after the fall in home prices. There are 11 million plus underwater homeowners, almost 25% of all homeowners with bank loans. Konczal thinks the difference in the real losses to the big banks might be as much as $150 billion, which would require them to raise large amounts of additional capital. One analyst has predicted that the big banks will need to set aside an extra $33.2 billion starting this year because of home equity loan losses, enough to wipe out most of their estimated profits for the year. Home equity loans are a particular problem because long after the homeowner stops making payments, the banks continue to count the loan as current by adding the interest not paid to the loan balance. Second lien holders are balancing delaying the loan modification or short sale process and urging the homeowner to continue paying with action to avoid foreclosure, where the second lien holder will probably receive nothing.
Our anecdotal experience has been that most distressed homeowners have second liens. In most cases second lien holder banks have been unresponsive in releasing liens to allow short sales. As an example, we can document a short sale that took us 13 months to complete, and we have others where the seller (and of course the buyer) has been waiting more than 5 months for a response from the second lien holder. Literally hundreds of other agents in the Certified Distressed Property Agent network are reporting the same thing. Millions of distressed homeowners are being punished by the unnecessary delay in resolving second liens. With financial reform at our doorstep, it would seem that the government could trade some of the good will that is helping the banks to profit for their cooperation in helping homeowners more quickly sell their homes.
