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Proof that the U.S. banking system is a big head fake

Saturday evening I had dinner with a number of American friend, Europe and its problem was at the core of their discussion, I kept my mouth shut until one guys said that they were happy to live in the U.S. were things were much better.  It shows how little people understand about the American's financial system's difficulties.  In fact, the U.S. banking system is probably insolvent (as a whole).  Last night, I did a bit of digging and this morning David Rosenberg provided the bulk of the pieces.  First, here are some numbers:

  1. Two-thirds of American homeowners have a mortgage — 56 million in total. Around 50% are guaranteed by the GSEs (e.g. Fanny May & Freddy Mac), 35% are held directly on the balance sheets of the banks, and 15% are private label. .
    1. Estimates suggest that 14% of these 56 million mortgages are already in arrears or in the foreclosure process
    2. This means that about eight million Americans have stopped paying their mortgage. Staggering.  
    3. Other estimates suggest that over 90% of these late-paying/non-paying debtors will never get back to being current. So what we are looking at is something like 7.2 million mortgages that will inevitably go into foreclosure in the near future. 
  1. Meanwhile, the pace of foreclosures has been slowed via loan modifications brought on by government pressure and the simple fact that banks do not want to take deflated property onto their books.
  2. What does not get reported often enough is that the rate of non-foreclosure on delinquent borrowers is surging — 24% of the people who have not made a single mortgage payment in the last two years have still not been foreclosed on.
  3. The banks don’t want to take the hit and in the meantime the foreclosure pipeline is completely clogged up. (It has to be said that the banks are content in kicking the can down the road since homeowners are making good on their second lien — $842 billion outstanding, most held at the big four banks, and they are holding these at par even as the first lien has already gone bad!) 
Second liens worth USD 842 billion, which are probably worth nothing (since they rank junior to the first lien on the houses).  As a matter of curiosity how much of the US financial system doesn’t 842 billion presents?  How about 112%

In effect, the US banking system is bankrupt when one takes into consideration ONLY their exposure to second mortgages on residential building – forget the losses when one considers commercial real estate.

That’s how bad it is!

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