Bank Losses on Housing Total $500 Billion

Banks and credit unions are seeing the impact of the housing and subsequent mortgage meltdown become more acute, according to a couple of separate reports. However, how much credit unions have actually been affected is the subject of some debate.

According to data compiled by Bloomberg, banks have now lost more than $500 billion on writedowns on loans backed by real estate. Although fueled primarily by the collapse of the subprime mortgage market, many Alt-A and even prime mortgages have gone bad as well.

Hardest hit were Citi ($55.1 billion) and Merrill Lynch ($51.8 billion). Consumer banking giants Bank of America and Wachovia have each lost more than $20 billion so far. An economist at New York University told Bloomberg that he expected total losses to eventually surpass $2 trillion.

The writedowns and declining property values are severe in many major markets. In the Chicago area, for example, more than 21 percent of homeowners who bought single family properties in the last five years now owe more than their home is worth, according to a report in Tuesday’s Chicago Sun-Times.

The problem has expanded beyond the large lenders and homeowners to credit unions, which tend to be more risk averse than larger financial institutions, The Wall Street Journal reported earlier this week.

Five of the nation’s largest credit unions are reporting big paper losses on mortgage-related securities, the Journal reported, adding that the federal regulator overseeing credit unions said the losses are likely to be reversed when mortgage markets stabilize, and that the institutions are sound and adequately capitalized. But some outside observers are concerned that the credit unions are underestimating the depth of their mortgage-market problems.

The National Association of Federal Credit Unions (NAFCU) questioned the Journal article.

“[The] story in The Wall Street Journal fails to make the distinction between corporate credit unions, which serve other credit unions, and natural person credit unions, which serve individuals. In addition, in several instances, the term ‘big’ is arbitrarily substituted for ‘corporate’ in the article,” NAFCU president Fred Becker said in a prepared statement.

“It is important for the public to understand that corporate credit unions’ investments are limited to the most highly rated securities. Also, natural person credit unions, otherwise referred to as regular credit unions in the article, are demonstrating solid fundamentals, especially by contrast with other federally insured institutions, like banks,” Becker added.

Additionally, Becker noted that:

• The overall loan delinquency ratio for federally insured, natural-person credit unions is much lower than for other federally insured institutions: 0.91 percent in March 2008 compared with 1.71 percent for FDIC-insured institutions.
• The charge-off ratio for first mortgages held by federally insured credit unions was 0.06 percent in March vs. 0.76 percent for FDIC-insured institutions.