Loan Delinquencies & Loan Losses Continue to Hit Record Levels In Almost all Loan Product Categories May 18, 2009 http://www.glgroup.com/News/Loan-De...Almost-all-Loan-Product-Categories-39123.html * Analysis by: James McMahon * Analysis of: Consulting Management Platform * Published at: www.financialexpress.com Implications Loan Delinquencies & Loan Losses Continue to hit record levels In all Loan Product Categories as this lastest economic cycle moves hrough the pipeline. Even with the changes that most FI's have made to their loan policies and underwriting guidelines the number of loans madewithin th the prior parameters continue to move through the pipeline. Since deliquencies and loan losses are another lagging indicator within the cycle we are just starting to see the final chapter being written on where these two major indicators will end up. The key question is where will these delinquencies and losses rank in relation to previous cycle highs...Does anyone want to guess? How long will it take to see these levels? Analysis One of the characteristics that we see in within every economic cycle is the effects that cycle has on loan delinquencies and loan losses. In many cases delinquency in specific loan categories are one of the drivers or the cause and effect in the start of an economic downturn or credit crunch. In some instances they are after effects. In this current cycle we can clearly state that this downturn started primarily with the huge wave of real estate loans and secondarily by large volumes of indirect and direct auto loans and credit cards made in the late 2005, 2006 and 2007 time frame. During this period a false sense of security and comfort fell over the lending world. Delinquencies and loan losses were at historical lows and competition for new loans and customer relationships was at its peak. Then in 2006 when the new Democratic congress and Senate took over there was a concerted effort from Barney Frank, the House Banking and Finance committee chair and Chris Dodd, the Senate Finance committee chair to open up the opportunities of home ownership. Both of these committee heads worked with Fannie and Freddie to develop new mortgage products and new relaxed underwriting guidelines that would make more people who did not qualify previously would now qualify for a mortgage and would be able to buy a home. Fannie and Freddie put out the word that they would buy up as many new mortgages as could be made under this new âopenâ process. So the industry complied. New products with increased leeway for stated income, loan to values of 100% or greater higher were in vogue. Alt-A adjustable rate loans with low teaser rates were encouraged and a host of other weaker underwriting guidelines and credit policy parameters were put into place. Many financial institutions worked with loan brokers and mortgage companies to originate and sell whatever mortgages they could. Since no one was required to verify income, employment history, level of assets and liabilities, liquidity etc. a whole new genre of applicants submitted what is now called âliar loansâ to get their piece of the âAmerican Dream.â Of course the same relaxed approach to other consumer loans took place as well. Direct and indirect auto loans as well as credit cards were done under the same type of amended underwriting guidelines. FICO scores offer were sufficient for qualification. Advance rates on car loans for Tier 1 customers were up into the 135% to 150% range. Subprime lending to auto and credit card customers also fell under this new process. Of course we are seeing the effect of lending to this segment now in the form of increased delinquencies and loan losses. Letâs take a look at some of the current and historical levels of loan delinquencies and charge off losses and the time frames these took place in a number of consumer and other loan categories. It will become very evident that the levels current delinquencies and charge offs are approaching or are at the highest historical levels we have seen since tracking by the Federal Reserve. While these numbers represent the last reported quarterly period of the 4th quarter of 2008 I can tell you that the upcoming 1st quarter 2009 number for both categories will show an even worse deterioration of the countries credit quality. It is clear that the current period we are in is just the beginning of what is yet to come in additional deterioration within all FIâs loan portfolios. From this chart we can clearly see that a number of delinquency and loan loss percentages are already at record levels. What is even more interesting is that the loan loss chart shows highest record loss categories than the delinquency chart does which indicates that loan losses are increasing at a higher rate than current delinquencies. This does not bode well for future credit quality trends across all of the FIâs and creates a concern of even great pressure on increasing adequate loan loss reserves and what pressure that will put on capital and earnings as we move further into the expected recovery. Delinquency Rates * As of 4th Highest or Quarter 2008 Next Highest Delin. Total RE Loans 5.78% 7.47% 2nd Qtr 1991 Residential RE 6.29% 4.42% 2nd Qtr 2008 Commercial RE 5.36% 12.06% 1st Qtr 1991 All Consumer 4.20% Highest on Record Credit Cards 5.56% Highest on Record Other Con. Lns 3.32% 3.56% 1st Qtr 1991 Commercial C&I 2.58% 6.41% 1st Qtr 1987 Total All Loans 4.59% 6.14% 2nd Qtr 1991 Charge Off Rates Highest of Next As of 4th Highest Charge offs Quarter 2008 Total RE Loans 1.79% Highest on Record Residential RE 1.62% Highest on Record Commercial RE 2.14% 2.78% 4th Qtr 1991 All Consumer 4.22% Higest on Record Credit Cards 6.30% Highest on Record Other Con. Lns 2.91% Highest on Record Commercial C&I 1.57% 2.37% 4th Qtr 2001 Total All Loans 2.01% Highest on Record The first quarter number of 2009 will be published soon. However, the monthly credit quality numbers indicate a deterioration in almost all loan credit quality categories. The significant reduction in extensions of credit to all markets as well as the re-tooling of almost all loan products underwriting guidelines and credit polcies have already taken place so we will see the performance of these loans as we move forward in time. However, the current loan portfolio's that were originated when terms were and due diligence were relaxed is still a large chunck of the portfolio's out there. The trends currently indicated that we may set new high levels of delinquency and charge offs in many of the categories listed above. Is this potential bad news on the credit quality front the next show to drop or will the markets react with little recognition knowing that this is really not a surprise?