Introduction

Loan Quality Improving But Volume Lackluster

Loan Quality Improving But Volume Lackluster

In spite of pitiful interest rates, bank deposits in the U.S. have increased almost every quarter in the past five years. Total gross loans, on the other hand, dropped precipitously during the recession as consumers  have feverishly tried to lower their debt ratios. (See graph A below.)

While those gross loans have yet to recover, the quality of those loans is clearly on the mend. Graph B shows how delinquencies have behaved over the same time period. After peaking at $409 billion, or 3.1% of total assets, in the first quarter of 2010, loan quality has slowly, but surely, been improving.

Since it was housing that created much of the mess of the past several years, we wanted to take a closer look at how that particular segment of loans is recovering. It may come as a surprise, but as the numbers clearly show, single family home loans are still slowing.

Graph C indicates how the country’s residential real estate loan business is faring by region. (The caveat here is that financial data is reported at the bank level so the loans appear in the region in which the bank is headquartered, not necessarily where the property is located.) Due to several large acquisitions in 2008 and 2009, we didn’t go back beyond 2010 in this chart.

For example, JPMorgan’s government assisted acquisition of Washington Mutual (WaMu) in 2008 gave the New York bank a huge presence on the West Coast but moved  WaMu’s extensive residential loan portfolio from the Western region to the Northeast, at least on paper.

Bank of America, N.A. Charlotte, NC’s 2009 acquisition of Countrywide Bank, FSB, VA didn’t have any effect on the region (both Southeast), but…

Wells Fargo Bank, N.A., Sioux Falls, SD’s acquisition of Wachovia Bank, N.A., Charlotte, NC in March 2010 moved about $127 billion in residential loans from the Southeast Region to the Midwest.

There have obviously been more recent acquisitions that skew the chart too, but none since then have been quite so large.