Banks Adjusting for New Loans
October 30, 2007
It is not just consumers and homeowners who are feeling the economy’s pinch. Big banks are showing poor quarterly reports which may indicate that the problems associated with the mortgage sector is now spreading its wings and becoming a problem in other sectors as well. In a nutshell, as consumers face more problems paying their bills (of all types) the banks take a hit.
The slowdown in the mortgage market and the defaults that have followed has caused some banks to increase their cash holding just to cover the loan losses they anticipate in other areas.
“Banks are adding to reserves not just for defaults on mortgages,” reports the Financial Times, “but also for home equity loans, car loans and credit cards.”
Just over the second quarter of this fiscal year alone, U.S. banks have had to raise loan and cash reserves by 6 billion in anticipation of this concern. In other words, banks are getting ready for a problem they see as headed their way, most of that rooted in consumer debt across a wide platform of markets.
“What started out merely as a sub-prime problem has expanded more broadly in the mortgage space, and problems are getting worse at a faster pace than many had expected.” Michael Mayo, analyst for Deutsche Bank.
Some experts believe that this widening credit crunch should not have been a surprise to anyone in the financial industry. Millions of people took out adjustable rate mortgages that are due to reset. Once these resets have occurred many homeowners simply find they do not have the cash funds on hand to make the payments anymore. Many revert to using credit cards to make payments and when that fails, the banks as well as the homeowners, lose