Despite Bank Profits We Are Not Out Of Woods Yet

Several of the major banks announced 1st Quarter, 2009 profits this week - Goldman Sachs, JPMorgan, and Wells Fargo all posted better than expected profits. In addition, the National Association of Realtors also reported that the real estate industry pending home sales is up indicating an increase in existing home sales while existing real estate housing inventory has dropped below 10 months. This positive news is leading many to believe that the worst is over and the economy and housing markets have stabilized. And quite possibly at any other time in history, this would be the true early indicators that our economy is on the mend.

However, to fully comprehend why these numbers do not necessary indicate economic stability, we need to first look at and understand what drove Goldman Sachs, JP Morgan, and Wells Fargo’s profits up. It appears that the one common denominator across all the banks is the low interest rates which have spurred home mortgage refinancing creating new profits. Wells Fargo’s Chief Financial Officer Howard Atkins acknowledged this when he said that the profits “reflected strength in our traditional banking businesses, strong capital markets activities, and exceptionally strong real estate mortgage banking results.” In addition, new accounting rules in early April allowed all banks (JP Morgan, Wells Fargo and Goldman Sachs included) to assign their own value to their assets versus using depressed market prices. Thus, they created 1st quarter paper gains that are offsetting losses. Also, don’t forget the moratorium on real estate foreclosures that most banks have been honoring which skews the real estate market numbers as far a number of homes on the market and the price of those homes.

Unfortunately, while these trends look and sound good in the short term, their sustainability is questionable for the long term. First, the refinance mania going on at JP Morgan, Wells Fargo, and Goldman Sachs is likely to quickly dry up since there are a limited number of people who can qualify to refinance their real estate loans. Second, the revaluing of assets paper profits, is just that – paper not reality pricing. Third, due to the moratorium on foreclosures, most banks have a large supply of non-performing assets or real estate mortgage loans that are in foreclosure. The banks will eventually have to release these homes on the open market which will further affect the real estate industry by increasing inventory and decreasing real estate prices. Plus, remember there are quite a few people that are still paying their mortgages but are upside down. By some accounts, at least one out of every five home owner owes more on their home than the real estate is worth. The question remains as to how many of these people will continue to pay or will eventually decide it is not worth it and let the banks foreclose on their homes as well. And fifth, with unemployment on the rise, the card divisions are starting to see surging consumer credit loan defaults.

While Goldman, Wells, and JP Morgan’s reporting of positive 1st Quarter 2009 profits does help to start the slow recovery process, we are not out of the woods just yet. It is the beginning of the end of the lack of confidence and negative outlook to more positive outlook and building confidence in the stock market and the real estate industry. A piece we have been missing for quite a long time.

The biggest advantage that may come out of all of this is that Wells Fargo, Morgan Stanley, Goldman Sachs and JP Morgan have all expressed an interest in repaying the American Public for the government bailout dollars they received. Now that is something to be celebrated!

Author Andee Nast is a California Mortgage broker. You are welcome to contact Andee at andeen@charter.net or 1-800-694-2265 extension 15 or on my website www.andeeallen.com.