Foreclosures & Bankruptcies

More and more Americans are having their home loans foreclosed. Bad credit is rising quickly; however, it’s not so much a personal matter any more. It’s the collective whole. Banks themselves have bad credit! There’s a new phase in the credit crunch, one of “$1 trillion losses” seems to be dawning. The crisis at Citigroup and renewed doubts about some of the world’s leading banks disquieted stock markets on both sides of the Atlantic yesterday, with the fractious mood set to continue.

Bill Gross, the chief investment officer of Pacific Investment Management, said US mortgage delinquencies and defaults would rise in 2008. “There are $1 trillion worth of sub-primes, Alt-As [self-certified] and basically garbage loans,” he said, adding that he expects some $250bn in defaults. “We’ve only begun to see the pain from rising mortgage payments,” he added.

Citibank’s increasing crisis announced further write-downs of up to $11bn on top of $5.9bn revealed in the third quarter. This isn’t chump-change folks!

In addition to pending fourth-quarter write-downs, Citi yesterday restated its third-quarter profit as $2.21bn and not the $2.38bn reported last month.

The banks remain unwilling to lend to each other, preferring to rebuild their balance sheets and “hoard liquidity” to buttress themselves against any shocks from repatriating off-balance-sheet losses from their special investment vehicles (SIVs). It’s every man and bank for themselves.

This tightening up has led to a vicious circle. Making credit tougher has exacerbated the problems of struggling mortgage holders in America; default rates then rise and make the banks even more exposed to losses as credit agencies downgrade their assets. This seems to be what happened at Citigroup. The admission that it was unable to assure investors that a potential $11bn write-down for sub-prime mortgages would not grow has led to this fresh fit of extreme nervousness.

Cleveland, Ohio, is an industrial city on the banks of Lake Erie in the US “rust belt” and it is an “un-shinning example” of the credit crunch. It is the sub-prime capital of the United States. One in ten homes in the city is now vacant, and whole neighbourhoods have been blighted by foreclosed, vandalized and boarded-up homes.

Huge write-downs by Merrill Lynch ($7.9bn) and UBS ($3.4bn) have not helped.

Banks with bad credit. How novel.

Worse yet? Governments (can you say USA) with worse credit. Being able to print more money has helped over the last century, but even that benefit may not save us.