The US banking system has always been a little bit like a leaky bucket. In normal times, when debtors behave as expected, the trickle out the bottom is small and steady, and the economy keeps topping it up. In the last year, as the holes became alarming large, the government turned the tap full open and kept it running. However, the flow of losses caused by the housing market shows no sign of slowing down.
Data released on Thursday from RealtyTrac shows that for the third time in five months foreclosure activity reached a record high. At 360,000, almost a third more homes received foreclosure notices in July than the year before. The four hardest hit states (Nevada, Florida, California and Arizona) still account for over half of repossession actions, but the data provider's heat map of the country is turning ever more pink.
The problem for banks owning mortgage debt is that the two greatest causes of foreclosure – negative equity and unemployment – are both set to rise further. Signs of a stabilisation in house prices are tentative at best, and where sales data is available, it appears to suggest that first-time buyers and cash investors are taking advantage of distressed sales. While that may start to support the lower end of the housing market, it indicates little support for McMansions bought with large “jumbo” loans – representing about 13 per cent of the value all outstanding securitised mortgages, according to Deutsche Bank.