Finance Helper

Despite the upbeat attitude surrounding credit markets over the past month, the fact is, bad loans are still a major problem that will likely severely impact the earnings of most bank for many quarters to come. The mortgage securities market is still devoid of private investment and until it returns, the government, in the form of Fannie and Freddie will be the only ones buying up home loans.

Although there are some concerns, the commercial real estate market has yet to encounter the problems of it’s residential counterpart. A lot will depend on how the economy fares for the rest of the year and what actions the government takes once it completes it’s stress tests for the nation’s largest banks.

Banks will continue to be tight with their money and many of them will hold back capital reserves to cope with expected future losses. Despite the drop in mortgage rates recently, likely only those with good credit will be able to refinance, leaving a large segment still in danger of default.

The consumer credit situation will be bleak for some time and losses from bad credit card debt is a rising concern amongst most banks. Rising unemployment is helping matters, as more and more people effectively lose their ability to repay credit.

Government loan modification programs will take some time to be effective and banks will obviously be reluctant to throw into question the value of mortgage securities once again, as it tries to re-attract private investment. That’s the reason why mortgage markets are pretty much dead, no one knows what they are really worth.

In the short term we can expect the government to continue with it’s gradual nationalization of bank as it attempts to shore up their capital situations.

Source: banks.com.