Moody's: Most Mortgage Losses Already Incurred

By:: Kirk Haverkamp | September 13, 2010

U.S. banks have already written off over two-thirds of the losses they are expected to take on soured mortgage loans during the current economic downturn, according to an analysis by Moody’s Investors Service.

Moody’s estimates that U.S. banks will take write-offs totaling $744 billion on loans of all types from 2008 to 2011, of which $476 billion (64 percent) has already been taken. It estimates that 68 percent of all residential mortgage write-offs have already been incurred, suggesting that most homeowners who will lose their homes to foreclosure have already done so.

At the same time, the picture looks more gloomy for commercial real estate, where only 49 percent of predicted loan write-offs had occurred through June 2010.

"We estimate rated U.S. banks have recognized nearly two-thirds of the aggregate loan charge-offs that they will realize from 2008 to 2011," said Craig Emrick, Moody’s senior vice president. "Although sizeable, the remaining losses are beginning to look manageable in relation to these banks' loan loss allowances and tangible common equity."

Emrick said it is clear that issues about the quality of bank assets have peaked, although charge-offs and nonperforming loans remain near historic highs. Loan charge-offs have decreased for three consecutive quarters (through the second quarter of 2010), while nonperforming loans were at their lowest level in more than a year.

The company expects a return to normal credit conditions within the next 12 to 18 months, although progress will be slow and uneven. It cautioned that a worsening of the global economy this year could strain credit conditions. It said there is a 20 percent to 30 percent likelihood of “severe” macroeconomic developments that would strain fundamental bank credit quality.

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