The rate of bankruptcies continues to edge upward, with consumer bankruptcies reaching essentially an all-time high for the last 12 months combined, discounting the rush that came before the consumer bankruptcy reform in 2005. Lenders became overconfident after the bankruptcy reform, believing that it would make consumer bankruptcies all but impossible. Instead, that lender overconfidence has led to a rate of consumer bankruptcy that is higher than it would have been without the reform measure. Bankruptcies force banks to recognize loan losses sooner than they would otherwise, and the rising rate of bankruptcies is likely to make some banks insolvent.
Consumer bankruptcies tend to be high when unemployment is high, and unemployment continues to increase. The new employment report shows total employment tracking with the growth in the labor force for the first time in more than two years. In a way, this is good news, but it also means that the total number of unemployed workers is still increasing.
The FDIC yesterday sold off a 50% stake in another loan portfolio. The portfolio, called Multibank Structured Transaction Single Family Residential 2010-1, contains almost $500 million in residential mortgages, over 3,000 of them, with half of them delinquent. The loans came from 19 banks that failed more than a year ago.
I do not expect any bank failures tonight during the Easter holiday weekend.