Maggie's Farm

One of the benefits of doing a look at the Chinese Non-Performing Loan problem is getting to look at the US system and find out where the 'goodies' are, to examine banking and credit finances in the US.

To start one goes to the Federal Reserve Board Charge-Off and Delinquency rates page ( http://www.federalreserve.gov/releases/chargeoff/ ). Delinquent loans are all those 30+ past days overdue and given as a percentage, per column, of loans in that column. Currently that is at 2.74% of residential loans, and that is about what was seen during the housing market bubble that ended in the early 1990's... folks do remember that, right?

Next is the Charge-Off rate, or loans uncollectable (although there may be some insurance coverage involved) as a percent of all loans. In the residential area that is 0.25% which, again, mirrors the previous housing market bubble in the early 1990's.

Both are at decadal highs, but not out of the range of measurement, even though it has only been measured since 1991. To put that into perspective the Credit Card column for this is (D/CE): 4.29% / 4.00%. It appears that once a credit card goes 30 days delinquent it is, basically, unrecoverable.

Now, to get the scope of that in the overall lending practices of all banks, we can hit the FDIC Uniform Bank Performance Report and take the 'All Banks' report:

http://www2.fdic.gov/ubpr/PeerGroup/Default.asp

Here, on page 2, we can see the historical increase of TE in loans to 'real estate' (notice that commercial and industrial are separated) which reflects these lovely sub-prime loans and other 'loan vehicles' that somehow have you paying higher percentages later which never get here until they do. A few lines down shows the volatility within a fixed range of Credit Card earnings based on what is lent via them. Increasing yields in real estate loans and more or less steady income in Credit Card: a money making combination.

On page 4 we get to see the outstanding percent of assets tied up in real estate on 1-4 Family Residential: 0.67%. Note Credit Card to get scale of the size of things: 0.14%. The overall scale of all loans on real estate, credit card, commercial, industrial: 11.37%

Skipping over the Loan to Lease ratios pages, we get to page 6 and the break-out of loans and leases. heading past their due date, with 1-4 Family Construction loans getting to 0.76% up to 30 days, and then 0.89% Past/Due. In comparison Credit Cards on 6A are 0.48% and 1.14%, respectively, mirroring the gross industry averaging at the FRB, although it counts slightly different things to get its rates. It is interesting to see that such a difference in percent does not mirror actual write-off, which tends to put high balance cards as the main loss in the P/D column.

Page 7 gives the Loans and Liabilities that are up to one year and past one year and how they balance each other off.

So this puts all those sub-prime loans in part of the larger real estate market which, iteself for residential work, is 0.67% of the overall banking industry. What most folks are worried about are the 'ripples' which could be similar to the pre-internet stock boom years of 1992-95. Remembering back to the pre-internet bubble can be difficult, but it was an era of pretty slow but continuous growth, that would see real estate come back by the beginning of the upward trend for the internet speculation era. Having bought a home in 1992 and watching its valuation go up to where it was before the last housing bubble, that puts recover at 3-5 years for something that is: widespread, systemic, has over-valued markets and a weak underlying economy. The ripples then were in the durable goods market. By the beginning of the net bubble economy, things had, basically recovered.

The sub-prime loans being such a smaller part of the overall residential mix and that, itself, being a small part of the economy, I don't see what the fuss is about. These NPLs will be quickly expunged through the system as no longer term GDP depends on it: it was a market to get more money for bankers. Remember that is a residential NPL rate of 0.25% and only as 0.67% of the overall real estate market held by banks in their portfolios or, yes, less than 0.02% of the banking supported economy.

China's problem is that, on the conservative side, 30% of its GDP is underwritten by NPLs. Sub-prime loans, at worse, are 0.5% of the GDP. Japan, before its bubble, was at 10% of its economy on NPLs, and the other Asian Tigers that went down similarly were at 12-15% NPL rates. Fussing over sub-primes? Why? Are you prepared for the end of the Chinese bubble economy?

http://ajacksonian.blogspot.com/2007/02/directivity-of-china.html