Another financial earthquake is coming, and the fault line may run through Charlotte.
Last week, Bloomberg and Moody’s Investors Service said the nation’s four largest banks, JPMorgan Chase, Bank of America Corp., Citigroup Inc. and Wells Fargo & Co., may record more losses on bad loans than they have so far in the last two years.
The credit rating company didn’t break out the individual bank losses in its report, but the four institutions together could post charge-offs of nearly $200 billion in 2010 and 2011 on mortgages and consumer loans, Moody’s said. That’s more than the $166 billion of loan losses they posted in 2008 and 2009.
“Our view on the fundamentals of banks around profitability and asset quality is still extremely negative,” the Moody’s report lead writer Craig Emrick told Bloomberg.
This comes as a second wave of five to seven million properties stand on the brink of foreclosure across the country. The Washington Post reports that these properties are foreclosure-eligible but have not yet been processed by the banks, in part because pulling them out of limbo could devastate the real estate market, sending property values tumbling further. These properties have created something of a shadow market not yet counted as part of the housing crisis, and banks’ ability to hold back the backlog indefinitely is questionable.
Unlike the first wave of foreclosures, which were attributed to risky loans, these are the result of job losses and cratering home values. In addition to the loan losses hitting our big banks, the impact of the coming inventory glut is bound to add even more pressure to the Queen City’s housing market and its economy.
This comes as yet another round of foreclosures bears down on the real estate industry.
Last week, the Congressional Oversight Panel for the Troubled Asset Relief Program (aka TARP) warned that a coming wave of commercial real estate foreclosures could threaten America’s struggling financial system. In a report, it said that between 2010 and 2014, commercial real estate loans totaling more than $1.4 trillion will come due. Close to half of those are under water because commercial property values have dropped 40 percent in the last two years.
“The report is designed in part to wave a red flag to signal there is a serious problem coming and it will hit an already weakened financial system,” the Los Angeles Times quoted the panel’s chairwoman, Elizabeth Warren, as saying to reporters.
The potential losses could run as high as $300 billion and threaten the financial system as a whole and the third of the country’s banks that have high concentrations of commercial real estate on their books in particular. While the big banks don’t have as much commercial loan exposure as the country’s smaller banks do, Warren warned that if hundreds more community banks go under, “the effect could be to dump sand in the gears of our economic recovery.”
What this means for Bank of America and Wells Fargo, two of the city’s top four employers according to the Charlotte Chamber, is anybody’s guess. Five years ago, the devastation that would hit our banks in this recession was unthinkable. Locally headquartered Wachovia was swallowed by Wells Fargo after disastrous financial decisions during the housing boom took their toll, a demise few locals saw coming until just weeks before it happened.
So what all this will mean is hard to say. But with the TARP oversight panel talking about injecting money into these banks again or launching a government program to buy up some of their bad assets, the potential problems these institutions face must be significant. With additional big bank bailouts exceedingly unpopular though, it’s anyone’s guess what Washington will do, or what price it will extract for what it does. Banks big enough for a bailout are big enough to be broken up in the view of many in Washington. That too could rock Charlotte’s foundation.
Last week, Washington politicians began talking about another $100 billion bailout of local governments. Among those that will need propping is Mecklenburg County. Borrowing in recent years by the county commission was so out of control — including for things like kids’ water parks — that county commissioners didn’t realize they didn’t have the funds to borrow or pay for the schools and other projects they put on their last bond referendum until a rating firm informed them they’d crashed into their credit limit.
Now the county commission is facing the end of the county’s AAA credit rating if it borrows much more. Commissioners are also looking at a budget so swelled by the debt payments they racked up over the last decade that increasing school budgets in the future may be impossible without large tax hikes. Just paying the county’s most basic expenses will be a challenge — including the education of the county’s children — with a commercial tax base that The Charlotte Observer reports could be dramatically devalued. If the TARP panel’s warnings about commercial property values are correct, this year’s county budget shortfalls, likely to run in the tens of millions, will look minor compared to future ones as the tax base erodes.
Or maybe, somehow, this will all just pass us by.
This article appears in Mar 16-22, 2010.
