If you really want to understand what is going on in the housing market, look no farther than banks’ loan loss reserves. In fact, look no farther than Citigroup:
Citigroup is standing firm against releasing loan loss reserves on its mortgage portfolio because of the overhang of foreclosures that have yet to hit the market.
The banking giant’s primary concern is its mortgage portfolio as it continues to wind down assets in Citi Holdings, Chief Executive Vikram [B]andit said on a conference call Monday. But in response to the substantial foreclosure backlog, ongoing political headwinds and risks from a weakening U.S. economy, [B]andit said the New York-based bank has not released any loan loss reserves against its mortgage portfolio to date.
The bank, however, released $984 million in loan reserves against nonmortgage-related lines of business in the second quarter.
Citi’s total allowance for losses stood at $27.6 billion at quarter-end, or 4.3% of total loans, compared to $34.4 billion, or 5.4%, in the prior year period.
John Gerspach, Citi chief financial officer, who is perennially negative on the mortgage business, said he remains cautious in overestimating the meaning of green shoots throughout the nation.
“As far as the risk of the foreclosure overhang, there are still a lot of foreclosures in process that have yet to hit the market,” Gerspach said. “I don’t look at this as being a robust housing situation. Maybe a little bit of it comes from the fact that I lived through the mortgage issues of the early 1990s. It took years for that to clear up, and in comparison the early 1990s were small potatoes compared to what we’re going through now. So I need to see a little more evidence.”
They are expressing no confidence in the real estate market, and it seems to me, this now humble and chastised institution, the industry laggard, is at least expressing reasonable concern about its loan portfolio. There is nothing better for a bank than to announce a reduction in loan loss reserves because the amount released goes to their bottom line. So, this negative view of the housing market tells us something important.
JPM, that happy-go-lucky trading firm, announced that it is reducing such reserves, while Wells Fargo is increasing them. By the way, Warren Buffett, WF’s biggest shareholder said that the bank originated 33.9% of all U.S. home loans in the first quarter, more than triple that of JPMorgan Chase. They love that ZIRP. If interest rates ever rise, I wonder what that would do to their loan portfolio?
