Friday, February 29, 2008

UBS expects bank losses to reach $600 billion

Wow what a day in the markets today. The DOW ended up down over 300 points today. This was the fourth straight monthly loss on the DOW. this hasn't happened for 5 years. Much of the losses are a result of housing related issues.

UBS started the day out with some "wonderful" news. Banks are expected to lose more then 600billion dollars as a result of the subprime collapse.

As you can see banks have only written off $181 billion to date. That means we are only about a third of the way there folks. This also does not include the expected CC defaults as a result of the consumer being swallowed up in debt.

What this means to you and the housing market is there will be less money to lend because your banks have lost billions.
It was reported on CNBC(or CNBS as I like to say) that the banks will cut lending by 2 TRILLION dollars. Thats Trillion with a T not a B. Needless to say this is not good for the housing market. How does that effect the buyers? It means they will tighten lending standards and they will further scrutinize mortgage apps. because they are staring off the edge of a cliff.

I fully expect that a year from now it will take 20% down and excellent credit scores in order to buy a house. So when you are in Cali or Florida or in Baltimore/DC ask yourself one question when a realtor is showing you dozens of houses listed at $700,000. How many people have 20% to put down which would be $140,000 plus an excellent credit rating to be able to qualify and buy these houses. The answer? Not many.
As a result, you will have a much smaller potential buying pool of homebuyers and they will have massive inventories to pick from. When you combine these two forces and combine it with the massive increases in foreclosures it creates "The Perfect Storm". As these banks continue to pile up foreclosures and their capital keeps shrinking with huge writedowns they will be forced to sell these homes at HUGE discounts. So you may ask how much worse can it get? Look at the Arm reset chart above and you can see the subprime resets peak in March of this year and continue throught 2008. This does not include the Alt-A and prime mortgage defaults that I plan on discussing later this weekend.

The bottom line? The banks simply can't afford to take anymore risk because they are in debt up to their eyeballs and bordering on insolvency. As I said yesterday you will see many banks fail because their books of mortgages are larger then their capital base. If too many of those mortgages on their books fail then their capital is GONE.
I suggest you look at your personal banks mortgage exposure and see how involved they got in subprime. Banks in the bubble areas like CA, NV, FL are vulnerable. Try to stick with a larger instituion or a smaller conservative bank that didn;t do a lot of subprime.
Well $181 billion in losses down and it looks like another $320 billion to go. This will only put more pressure on housing prices. The weakening market isn't helping either!!!

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