Foreclosures: Bank Balance Sheet Struggles

Banks are having trouble right now as their balance sheets are laden with increasingly difficult loans. Foreclosures remain a concern, causing worries that banks will have more writedowns. What makes these particular foreclosures more alarming is the fact that they are prime mortgages, many of them with fixed rates.

Subprime mortgage foreclosures have been decreasing. For the banks, it means that many of the mortgages that preceded the global financial crisis have worked their way through the cash flow system, and that there isn’t much left to fear from that segment of home mortgage loans. The more distressing thing is that foreclosures are rising amongst prime borrowers.

Banks, which have seen their balance sheets out of whack despite some high profits recently, are concerned that the unemployment rate is affecting the ability of prime borrowers to make their payments. Even if someone had good credit to begin with, losing a job can make it very difficult to make mortgage payments going forward. As non-performing loans rise in number, it is clear that banks may be seeing further problems.

And, of course, if banks continue to see problems, it will be harder for them to decide to make loans to other businesses, and there is a very real possibility that it could slow overall economic recovery.

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