Sunday, October 08, 2006

The Non Existent Banking Crisis

Right now in California, there has been 3,855 houses that have been foreclosed on. Let's just round it up to 4,000 and figure that each loan is $500,000. So it's 4,000 times 500,000. Just count the zeros and multiply the whole numbers together. The answer is 20 with 8 zeros added to it. Two billion dollars of real estate is in default in California so far this year.

Its highly probable, that on the way to foreclosure, the owner has also maxed out their credit cards. Let's figure the amount owed on credit cards, for a family in this predicament, would probably range between $10,000 to $50,000. Here would be a real, on the books, banking loss of between 40 to 200 million dollars.

There have been 23,000 bankruptcies so far this year and about 49,000 pre-foreclosures. Here is a Link to the numbers I am quoting. If we figure that the 23,000 bankruptcy's have between $10,000 and $50,000 in credit card debt, that calculates out to between 230 million and 1.15 billion dollars of bad debt.

Speculate further, that about 4,000 of the 49,000 pre-foreclosures go into foreclosure. That's another two billion of real estate in default and of course another 40 to 200 million of bad credit card debt.

This leaves a range of between 310 million (20+20=230) to 1.5 billion (1.15+.2+.2) in bad credit card debt. If the banks can pull out 80% of their loan value on the 4 billion of real estate in foreclosure, then that would result in a loss of about 800 million.

The most optimistic numbers, would be 310 million in non collectible credit card debt and a zero loss on all real estate foreclosures (the Tooth Fairy lives!). The worse case for the banks would be 1.5 billion in credit card debt and close to 1 billion in real estate write offs.

This is kind of boring stuff, but remember, this is only one state, California. Visualize all 50 states together, now it begins to have some size and body.

One person in bankruptcy or foreclosure is not the end of the world. But a bank, with a couple hundred foreclosures and a lot of bad plastic, knows the reality of their problem right now, at this present time.

The first signs of fire in the movie theater will be after the end of the fiscal year for these banks, when they have to present their profit and loss statements.

As if things couldn't get worse, two trillion in bank loans are due to reset in the next 12 months. Here cometh the Anti-Tooth Fairy. So with the banks Federally insured (and you thought the Tooth Fairy was dead) the New Year could prove very distracting.


mbarl said...

Finally the main stream media has caught wind of the problem with liar loans! The following clip is a story that was done by CBS in San Francisco on a special called 30 minutes.
Could have gone a little deeper, but this is a great start!!!!

Jed said...

An article in The Christian Science Monitor last week projected 500,000 foreclosures on loans originated during FY 2004 and FY 2005, nationwide. If each foreclosure results in a combined loss on REO and credit cards (assuming bankruptcy also occurs due to maxed-out credit cards) of $100,000, that would create $50 billion of loan and investment losses. I am guessing that the current provisions for such losses are a tiny fraction of the losses that are likely to occur.

Jim in San Marcos said...


500,000 foreclosures or think of it as 500,000 families in foreclosure.

Figure a family consists of 4 people; two adults and two children. Kiss the credit cards goodbye and now you have 2 million people not consuming on a normal basis.

The time element is in play right now. It takes 9 months pretty much to foreclose on a house in California. But looking at some of these bankruptcy filings it could be a lot longer. Anyone have any information on how long a bankruptcy proceeding takes?