Sunday, October 17, 2010

Just when you thought the all clear had been sounded--doubt creeps back into the banking system.



 The bond markets are telling us that they are concerned about the problems with foreclosures. All of the major bank stocks have taken a hit over the last few days. Just one example of the decline is Bank of America. On October 5th the stock was priced at $13.56 a share. As of October 15 the share price is down to a low of $11.74 for a decline of $1.82. The percentage decline is just under 13% in 10 days. A recent article stated that Bank of America might have to buy back $70 billion in foreclosed mortgage loans.
 
The problem in the foreclosure market place is, in simple terms, fraudulent foreclosure documents. I saw an article that shows three different signatures on various foreclosure documents and perhaps none was the signature of the real borrower. So, as Ronald Reagan once said, “there you go again.” The mortgage and housing problems are still significant trouble in our financial system.
 
Doubt will start creeping back into the banking system if it hasn’t already and bankers will be asking themselves, “Do I want to deal with this bank when I don’t know their exposure to the foreclosure problem”? The chief financial officers of both public and private corporations will again be asking the same question about their money on deposit at banks.
 
There are risks in keeping large sums of money in the bank. Regardless of the amount of money you have in a bank the maximum FDIC insurance on deposits is $250,000 per tax ID number per institution (bank). If you have more than $250,000 on deposit, regardless of the type of the account, the amount in excess of that $250,000 makes you a general creditor of the bank. As a general creditor you have no real way of knowing what the bank is doing with your money.  In the accounts I manage for my clients I have no more than $250,000 in all accounts per tax ID number on deposit at any one bank. I do not need to take the risk.
 
So how bad is the foreclosure problem? If the banks are forced to stop all foreclosure proceedings until the regulators can figure what to do about the problem it could take to well into 2011 before we see some resolution and the housing market will shrink dramatically. As more and more information starts to come out I will watch several indicators that you can watch with me. Please keep in mind that a house that is in foreclosure in Florida may have a mortgage owned by an investor in Europe or the Far East so this problem may have international implications.
 
What to watch:
 
The yield on the 10 year T-Bond
 
The yield on 30-day and 90-day LIBOR
 
The PJB which is an ETF of the major banks
 
If the credit markets fear another major problem with foreclosures it will show up in these three areas. I do not think we can get out of the foreclosure problem regardless of the forged documents, until we get millions of people back to work.
 
The election in two weeks is about jobs and only jobs. If you don’t have a job nothing else matters.
 
Dan Perkins

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