Why are banks looking so fragile these days ? so what if house prices drop for a few years, why the panic?

Question

Why are banks looking so fragile these days ? so what if house prices drop for a few years, why the panic?

Answer 1

banks have to maintain capital requirements, and they are trying very hard to stay liquid.

if house prices drop for a few years fannie mae and freddie mac will be given to the government sooner and it could downgrade the S&P rating on the united states's debt.

Answer 2

Banks make money on economic activity.  If everybody feels poor because the value of their home has dropped, economic activity slows down.

A lot of banks trade securities for their own account and bought mortgage backed securities that are now worth a lot less they thought.  Some are backed by mortgages that won't be paid back.

Answer 3

When housing values decline, people lose equity in their homes. This equity is money people thought they were guaranteed, so they may have taken out home equity lines of credit or increased their spending habits. Now that they have lost that equity, there is a higher risk of the bank not receiving their owed amount in full and the property being foreclosed upon. Essentially, the bank loses money.

Answer 4

Why the panic? Because banks made the mistake that many people made of spending more money than they can afford.

A few years ago, everything was rosy and people were encouraged to buy a home and take the highest possible mortgage. If they already had a home and the house was worth more than their mortgage, great, take a second mortgage and you will have plenty of money to do fun things with.

Banks were giving out lots of loans and made a lot of money on the interest so they got greedy and found creative bank ways to give out even more loans.

Now someone loses his job and cannot make the mortgage payments. This is bad because the mortgage is 200,000 but the value of the home is dropping to 190,000. In foreclosure the bank has a problem. They are not in the business of owning homes and selling them and foreclosure sales won't get the maximum price so maybe they will only get 150,000 for it. The owner still owes them the missing 50K but they won't get the money from them simply because they do not have it.

Now a bank can afford to lose a bit here and there but when too many people are in this situation at the same time, the bank will not be able to meet ITS OWN obligations and then the bank goes bankrupt. Which means bad news for other banks because they often have deals together, lending money to each other so now another bank is also in trouble.

This can have a real nasty ripple effect and people get scared because they do not trust banks anymore so they withdraw their money - now the banks have even less cash to work with.