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Losses Will Shift from Write Downs to Provisions
By Ted Cornwell
Major financial institutions have written down the value of their mortgage assets by more than $94 billion dollars since last August and added $15 billion to their provisions for loan losses, and the toll from deteriorating home loan performance is expected to grow.
But an analysis done by Friedman, Billings Ramsey & Company says the balance of future bad news will likely shift toward loss provisioning and away from write downs. FBR estimates that big banks will experience between $59 billion and $148 billion in losses from their mortgage portfolio holdings over the next few years, depending upon the extent and timing of home price declines. Those portfolio losses will "negatively impact book values and depress earnings well into 2008," FBR's Paul Miller predicts in a report. FBR estimates that financial institutions hold $860 billion of second lien home loans and HELOCs on their books, a segment of the industry that is expected to bear a heavy loss burden.
Most of the extra provisioning expense will be absorbed by institutions that have a high volume of HELOCs, subprime, alt-A and pay-option ARM loans in their portfolio, FBR said, noting that the vast majority of the write downs taken to date have related to subprime and alt-A mortgage products.
"We expect provisioning to increase substantially over the next few quarters and begin to dominate the headlines, putting continued pressure on banking stock multiples," FBR's equity analysts said.
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