As big banks enter the New Year, and the new decade, the ghosts of the past — bad mortgages — will surely follow.
And because of that, banks have been on a capital-raising binge during the past year — and they still have a ways to go, says Gary Parr, deputy chairman of investment bank Lazard Frères.
“There are a lot of financial institutions that still need to raise money,” he told Bloomberg. “Arguably it’s $600 billion on a global basis.”
The risk is that investors eventually will tire of buying these stocks, Parr says.
“Going back to March, everyone buying the stocks has made money. Success breeds success. But at some point, if that tips over, that will be a big problem for banks.”
On a scale of one to 10, banks’ appetite for risk now stands at five, up from one six months ago, but down from 10 two years ago, Parr says.
“We’re a long way from being really ebullient and people feeling bold about doing things in financials.”
Wall Street has changed because of the lessened risk tolerance, Parr says. “For example, if you were working in a part of Wall Street that centers on securitization, which was a big part of Wall Street two years ago, that’s very small now.”
Global regulators share Parr’s concern about banks raising capital too quickly and are mulling a delay of new capital requirements.
"A delay in stricter banking regulations eases concerns that banks will need to raise capital,” DZ Bank analyst Matthias Duerr wrote in a note to clients.
Meanwhile, serious delinquencies among U.S. prime mortgages rose nearly 20 percent in the third quarter from the prior quarter, as the percentage of current and performing mortgages fell for the sixth consecutive quarter, banking regulators recently said.
The report by the Office of Comptroller of the Currency and the Office of Thrift Supervision, which are part of the Treasury Department, covered about two-thirds of all U.S. mortgages.
It found 3.6 percent of prime mortgages — those made to the most credit-worthy borrowers — were seriously delinquent in the third quarter. That was more than double the year-ago quarter and up nearly 20 percent from the 2009 second quarter.
The report defined "serious delinquencies" as those loans 60 days or more past due and loans to delinquent bankrupt borrowers.
Big U.S. banks and thrifts carried out 2.4 million home loan modifications, trial period plans or payment plans in the quarter, spurred mostly by a government plan offered by President Barack Obama, according to the report.
Elsewhere, Deutsche Bank researchers say home prices will drop a further 10 to 12 percent from current levels.
The projections come from the securitization arm of the investment bank and are the first forecast expanded to include more factors that impact home prices overall as well as a variety of ranges that include month-to-month and peak-to-trough, housingwire.com reports.
“A change in market psychology (which can both cause, and be caused by, recent home price increases), some signs of labor market stabilization and various government programs aimed at easing the housing crisis have all been constructive for housing,” DB researchers write.
Nonetheless, recent home price gains have likely run their course.
“Government bailouts lack the potency to counter larger issue of unemployment, tight credit and the rising negative equity,” they say. “In the worst of it, with another 29 percent decline in home prices (is) projected.”
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