The Burden of Loan Repayment on the Federal Reserve

Since the Lehman Brothers shock two years ago, and still now, the focus of the American financial system has been the housing market. If we examine the accounts for Bank of America between July and September 2010, we will know this to still be the case.

What stands out as we examine the accounts is the decrease in lending as a whole. The total lending balance at the end of August for the big four banks — JP Morgan Chase, Citi Group, Bank of America and Wells Fargo — was a little over $3 billion, down 3 percent from July.

The banks are not lending enough to individuals and businesses, but this is because they are uncertain about their own financial standing.

The Fed has reasons for concern:

One problem is the repayment of housing loans. Although the loans were taken out from banks under a government housing loan scheme, two of the banks did not check on the annual income or other indicators of financial stability of the borrowers, and so now it is being demanded that the loans be returned.

According to the global ratings agency Fitch Ratings, the maximum possible loss resulting from this mistake could amount to $42 billion.

Additionally, the banks did not thoroughly examine the housing loans they issued secured against companies of private individuals who concealed losses from securities investments, and are now demanding the repayment of those loans also.

The amount being demanded in repayment by the Bank of America at the end of September was $12.8 billion, a 15 percent increase from 3 months prior. Currently, they are preparing for a situation where loan repayment will become obligatory and have stockpiled up to $4.4 billion.

The other worry of the Federal Reserve is that foreclosing and selling the houses of debtors who default has become difficult. In order to auction the property, the auction documents must be correctly filled out by the property owner, but already the auctions of one group have been stopped to allow the documents to be checked and corrected.

If the repayments of housing loans and the postponement of house auctions continue to persist, uncertainty of the bank’s administration will rise and it is not unlikely that an attitude of caution and care will be taken with regard to the issuing of new loans.

Companies for which obtaining business loans is difficult will not increase their hiring, and that will become an obstruction to the recovery of the economy.

If the bad debt held by the Federal Reserve, which is anticipating a decrease, increases again, then it will invite a loss of confidence and become a cause for concern within the world economy. Japan, too, must focus its attention on the American housing problem.