Rising defaults pound profits at nation's banks and thrifts

WASHINGTON — Surging mortgage defaults whacked U.S. banks and thrifts in the second quarter. Profits fell 3.4 percent to $36.7 billion, and reserves to cover loan losses soared 75 percent from a year ago, regulators said Wednesday.

Results for the nation's financial institutions from the Federal Deposit Insurance Corp. (FDIC) showed that higher expenses for noncurrent loans, along with lower interest from investments, hurt profits in the April-June period.

The impact of the nation's worsening housing downturn on federally insured banks and savings institutions was evident in all aspects of the FDIC data.

The increases in noncurrent loans — 90 days or more past due — and set-aside reserves to cover losses were the biggest in 16 years for banks and thrifts. Total past-due loans jumped 10.6 percent, to $6.4 billion; nearly half the increase came from mortgage loans.

In the largest jump since 1996, 824 of the 8,650 federally insured institutions reported losses for the quarter, up from 600 a year earlier.

Especially hard-hit were smaller banks and thrifts and those heavily concentrated in home-mortgage and commercial lending.

FDIC officials acknowledged that more evidence of the housing-market stress will show up in results for the current quarter. The occurrence of what they call "declining credit quality" for banks likely will hit with fuller force in the July-September period, they said.

Wednesday, JPMorgan Chase, Bank of America, Citigroup and Wachovia each borrowed $500 million at the Federal Reserve's so-called discount window to ensure adequate liquidity.

Late Wednesday, Countrywide Financial said Bank of America invested $2 billion in the company, a deal that comes as the nation's largest mortgage lender tries to weather a credit crunch that's rocked Wall Street and the mortgage industry.

Countrywide reported last Thursday that it had borrowed $11.5 billion from several dozen banks so it could keep making home loans.

Banks and thrifts across the country have requested increased loans from the 12 regional banks in the Federal Home Loan Bank system.

FDIC Chairman Sheila Bair noted many high-risk subprime mortgages for borrowers with weaker credit histories will reset this year and next into higher rates.

"The payment reset problem is there and it's looming large," Bair said in a meeting with reporters.

In the second quarter, noncurrent home loans rose by $3.1 billion, or 12.6 percent, from a year earlier, the FDIC's report said.

It was the fifth straight quarter of increases in residential noncurrent loans.

Noncurrent loans for real-estate construction and development soared $2.2 billion, or 39.5 percent.

Banks and thrifts set aside $11.4 billion to cover loan losses during the second quarter, up 75.3 percent and the highest level since 2002, the FDIC said.

A huge spike in soured loans for real-estate construction and development also hurt bank earnings.

"Banks continued to face two key challenges — a difficult interest-rate environment and ongoing weakness in residential mortgage lending," Bair said. "The market's going through a period of adjustment. We knew it was coming; it was inevitable."

Mortgage delinquencies and foreclosures have skyrocketed this year, driving numerous lending companies into bankruptcy.

Figures released Tuesday by research firm RealtyTrac showed foreclosures soaring 93 percent in July compared with a year earlier.

The federally insured and regulated banks and thrifts have not been big issuers of subprime mortgages.

But as credit worries drag stock and bond prices lower in financial markets, investors have grown increasingly nervous about all types of home loans — stoking concern that lenders are seeing problems with quality-credit mortgages.

In recent weeks, the Federal Reserve and other nations' central banks have injected billions of dollars into the banking system.

The Fed last week also cut by a quarter-point to 5.75 percent the short-term discount rate it charges on overnight loans to banks.

On Tuesday, the Treasury Department's Office of Thrift Supervision reported that noncurrent loans at U.S. thrifts jumped to $14.2 billion in the second quarter, up 50 percent from $9.5 billion from a year earlier.

That's the highest level of noncurrent loans at U.S. thrifts since 1993, with most of the problems in home mortgages.

Still, given the circumstances, Bair said, the industry is in sound financial condition as the market adjusts and its second-quarter performance was "very solid."

Although profits declined 3.4 percent, the $36.7 billion recorded was the fourth-highest quarterly total since the FDIC began publishing the statistics in 1986.