JPMorgan: Banks Face Another $215 Billion in Mortgage Losses

April 20, 2009 No Comments »


It seems like we’re back in a negative spiral, after enjoying a few weeks of optimism and related stock market goodness.

The latest sliver of bad news comes from JPMorgan Chase mortgage-bond analyst Matthew Jozoff, who wrote in a report that banks are expected to lose another $400 billion related to bad loans, mainly those tied to souring real estate.

He said banks are expected to set aside $215 billion to bolster reserves against their deteriorating stable of $2.1 trillion in U.S. home loans that haven’t been packaged into securities.

Conversely, he expects losses from securities portfolios to slow because they’ve already experienced hefty write-downs.

Banks worldwide have already taken write-downs and losses of roughly $920 billion, while raising about $900 billion in capital, meaning more must be raised, likely with government assistance.

Of course, Jozoff spared his own bank by remarking that healthier institutions may not need more capital, and could raise it privately.

As of the fourth quarter, banks set aside $85 billion in reserves for residential mortgages on their books, according to accounting rules that require allowances for losses expected within the next year.

However, things like foreclosure moratoriums and loan modifications, coupled with falling home prices, are likely skewing the numbers and giving the banks more time to write off what look like inevitable losses.

Last week, a pair of analysts argued that Bank of America and Wells Fargo were in need of additional capital, citing their heavy exposures to risky residential mortgage loans.

Interestingly, Wells Fargo wrote off just $3.3 billion in the first quarter, compared with $6.1 billion in the previous quarter at Wells and Wachovia combined, which KBW analyst Frederick Cannon attributed to consumer tax refunds and foreclosure moratoria.

(photo: andymcleod)

Leave A Response