Advance 3Q 2009 Delinquency Rate Estimates - October 21, 2009

Bank Lending Trends - 3Q 2009 Estimates

Final figures for the third quarter 2009 are not due out for another month (late November), but based on earnings reports and call report filings from many smaller banks, Foresight Analytics offers its advance estimates of what the final 3Q 2009 real estate loan delinquency results will be. Note: these are preliminary estimates, not the final results.

Residential Mortgages (First-Lien Single Family Mortgages)

• Total delinquencies rose to an estimated 11.0% during the third quarter, up from 10.2% in the second quarter 2009 and from 6.4% a year ago. Aside from a nearly 2 percentage point jump in 4Q 2008, the delinquency rate has been rising by approximately 1% per quarter since 1Q 2008. We have been expecting the rate of increase to slow, but clearly this has not yet
  occurred.
• Nonaccrual rates jumped by 0.9%, from 3.8% to an estimated 4.7% during the second quarter. This is another new high for the nonaccrual rate since at least 1992, the beginning point for our data.
• The jump in nonaccruals represents a shift back to classifying serious delinquencies as nonaccrual. There had previously been a surge in the 90+ day past due category in 4Q 2008 and 1Q 2009, when lenders delayed the nonaccrual categorization in favor of working with borrowers on loan modifications and other remedies.

Construction Lending

• Total delinquencies jumped to an estimated 18.2%, up from 16.3% in Q2. This rate is nearing the 19.2% peak we calculate for Q1 1992.
• Nonaccruals are driving the increase, rising to an estimated 14.1% in Q3, up from 12.1% in Q2 and 9.8% in Q1.
• While for-sale residential construction loans (single family and condo) are by far the main source of problems, our estimates indicate that delinquency rates for other construction sectors, including apartments and commercial properties, are on the rise, too. Worsening fundamentals and reduced liquidity in the commercial real estate sector will likely contribute to further rises in the delinquency rate.
  

Commercial Mortgages

• The total delinquency rate rose to an estimated 4.7%, up from 4.1% in Q2, and more than double the 2.1% in Q3 2008.
• The delinquency rate has been increasing at an accelerated rate since Lehman Brothers’ collapse in September 2008 and the ensuing severe credit crunch and economic downturn

Advance 3Q 2009 Delinquency Rate Estimates - October 21, 2009

• The 4.7% delinquency rate is still well below the 8% delinquency rate in Q3 1991, but it is worrisome in light of a weak economy, severely constrained credit availability and a high volume of commercial mortgages coming due during the next several years.

Commercial & Industrial Loans

• The total delinquency rate rose to an estimated 4.2%, up from 3.7% in Q2. The delinquency rate has been trending up by approximately 0.5% per quarter, as the weak economy and reduced credit availability have put pressure on borrowers’ finances.
• The lack of credit is most apparent in the C&I loan category. We estimate a 6% decline in the volume of loans outstanding during 3Q, following several quarters of contraction. The volume of loans outstanding has contracted by approximately 15% since peaking in 3Q 2008.

See the following page for a discussion of our previous estimates’ accuracy.

For more information, contact:
Matt Anderson
Partner
Susan Persin
Partner
Tel: (510) 893-1760
Web: http://www.foresightanalytics.com
mailto:s.persin@foresightanalytics.com
mailto:m.anderson@foresightanalytics.com

Advance 3Q 2009 Delinquency Rate Estimates - October 21, 2009

Residential Mortgages

• Our preliminary estimates of total delinquencies have generally trailed behind the actual rate, although we were spot-on in 2Q.
• The error on nonaccrual rate estimates was +50 basis points, partly reflecting swings in estimates caused by the issues in classifying 90+ day delinquencies as nonaccrual.

Construction Loans

• Our estimates have been accurate, especially given the volatility in the figures.
  
• We overestimated the total delinquency rate in Q2 2009 by 80 basis points, after trailing the actual total in previous quarters.
  
• We slightly overestimated nonaccrual loans in Q2 2009, by 30 basis points.

Commercial Mortgages

• We overestimated the total delinquency rate in Q2 2009, overshooting by 40 basis points.
  
• In Q2, we accurately estimated the nonaccrual rate.

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