Federal Reserve data indicate that the credit health of Americans is improving in several categories. The delinquency rate on consumer loans is falling nicely. Business loan delinquency is declining in a similar fashion.
However, high delinquency rates still burden real estate loans.
First, the good news. Consumer loan delinquency dropped 37 percent in the past year from a peak of $59.8 billion on Jan. 1, 2010, to $37.6 billion in July 2011 (the most recent numbers posted). Another $10 to $15 billion of troubled consumer loans have to be resolved to get back to previous norms, but the trajectory of recovery is fast.
Business loan quality has increased substantially as well in recent months. The cyclical peak of this recession found 4.47 percent of business loans delinquent in July 2009. The rate has fallen every quarter since then to the current level of 1.87 percent.
Notice how the level of delinquency in this recession was noticeably lower than the recession in the early 1990s. Business loan quality looks great. This should encourage banks to expand loans to businesses.
Unfortunately, the health of real estate loans in the portfolio of our American banks still has a long road to recovery. The delinquency rate hit the cyclical peak of 8.76 percent in April 2010 and declined gradually to 6.69 percent at the end of June 2011. The banking system adopted the well-known policy of “extend and pretend” in 2008, and the result is that there are still a lot of troubled commercial real estate loans that will have to ultimately be foreclosed and sold to private investors.
Commercial real estate investors have been waiting for more than three years to purchase distressed real estate loans and properties. Clearly, there are many properties yet to be disgorged from the banking system. The question of “When?” remains unanswerable.
Commercial real estate transaction volume will likely stay muted until this “shadow inventory” of troubled commercial real estate sells to investors. Fortunately, Texas banks are much stronger than the national average and have capacity to make real estate loans.
The following chart explains why bank regulators are still “encouraging” banks to limit real estate lending. Regulators haven’t been able to foreclose and otherwise resolve the backlog of troubled real estate loans, so there is little enthusiasm to increase real estate lending until this backlog is cleared.
Notice how the delinquency rate peaked at 10 percent, well above the 7.5 percent peak in the early 1990s. Banks are making progress in cleaning up their real estate loan portfolios, but the pace is painfully slow for brokers, lenders, lawyers, title companies and moving companies that thrive on commercial real estate transaction volume. At the current pace of disposition, it will be many years before the real estate market credit conditions are back to “normal.”
This final chart is the scariest of the lot. The delinquency rate for residential single-family houses is simply astronomical by historical standards. Failed mortgage modification programs and legal challenges to foreclosure caused the average time to foreclose on a house to explode to 689 days, up from less than 300 days in earlier years.
The single-family mortgage market is the epitome of “extend and pretend.” Banks and mortgage servicers just don’t have enough people to process the massive foreclosure volume. This chart is a great measure to watch the progress of any recovery in residential real estate sales. It shows the shadow inventory of distressed properties that will ultimately come into the market and sell to investors.
We are already three years into the housing bust, and the troubled loans haven’t been addressed in any significant volume. If you make your living selling houses or in the many industries that depend on home sales volume for profitability, you need to root for the government to speed up the foreclosure process and clear this market. Until they do, homebuyers will be fretful that prices could fall farther when these properties ultimately sell.
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