Bank Notes

According to the June 2010 Economic Outlook released earlier this month by Fannie Mae’s Economic and Mortgage Market Analysis Group, all indicators are that we will see an upturn in multifamily housing starting soon.

The report indicated that multifamily development has been down dramatically in 2009 with a meager number of 109,000 units compared to 284,000 in 2008. Fannie Mae expects 2010 numbers to end up at 132,000 multifamily starts and rising to 188,000 projected for 2011.

Multifamily is defined as residential properties with more than 2 units namely apartment complexes and student housing projects. With multifamily starts up and demand for existing units up the housing market is poised for a recovery in the rental area in 2011 states Fannie Mae’s report. Recovery however, will be tied directly to employment figures and real income figures rising throughout 2011.

Many of the nation’s larger banks have managed to cordon off their troubled assets by selling or in Citi group’s case creating another group to hold these assets. Namely, Citi Holding. Other smaller banks employ groups of “special asset groups” who have been assigned the task of clearing out assets such as mortgages- loans- and securities.

But not all efforts have been effective.

The Treasury Department Public Private Investment Program, or PPIP, promised to buy one trillion of these assets in 2009 but has only purchased $12 billion since it’s unveiling in March 2009. Experts agree that U.S. Financial Institutions still have a ways to go before they are rehabilitated. Predictions include the top four U.S. banks to take as much as $228 billion in write downs in 2010 and 2011.

A new proposal initiated by the Financial Accounting Standards Board is another risk to banks health. All banks including commercial lenders would be required to value their loans based on market value which could make banks books look sick. This “mark to market” approach will have its biggest impact in community and regional banks.

With the economy stagnated and high unemployment we can expect a slow turn around for holders of those assets deemed toxic. We have identified the problem and it would take another severe downtown for it to become a problem we cannot handle.

The Financial Accounting Standards Board is considering changes in bank’s accounting that will require them to show loans on balance sheets at “fair market value” instead of original value.  This would immediately impact the way a bank is viewed by investors and regulators alike.  The rule, if instituted could reduce shareholders equity and regulatory capital to levels that could potentially eliminate some banks Tier I capital (equity).

The new changes will ultimately affect how a bank is valued by investors and also how much capital a bank will be required to have to do business.  More news to come on the troubled asset front and how to solve this ballooning problem.