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Monday, April 17, 2006

Caroline Baum: Banks Have No Exposure to Mortgages?

by Calculated Risk on 4/17/2006 01:50:00 AM

Carolina Baum writes: Banks Have No Exposure to Mortgages? Think Again.

Every time the subject of banks making risky home loans to bad credit risks -- no money down, no questions asked -- the usual retort is that banks sell the mortgages. They aren't at risk. It doesn't matter if the loan stops performing because they don't own it.

That's not exactly true. According to the Federal Reserve's Flow of Funds report for the fourth quarter of 2005, mortgages accounted for 32 percent of commercial banks' financial assets. Throw in agency- and mortgage-backed securities, and the exposure to outright and securitized mortgage loans is 44 percent.
However the data doesn't tell which loans the banks have kept. Most banks claim they have kept the better quality loans (low LTV).

A few statistics:
-- 43 percent of first-time home buyers made no down payment last year, according to a study by First American Corp.

-- 22 percent of the borrowers with initial interest payments of 2.5 percent or less have negative equity in their homes (the principal balance is greater than the size of the initial loan); 40 percent have less than 40 percent equity.

-- About one-quarter of the jobs created since the 2001 recession have been in construction, real estate and mortgage finance.