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Richard Suttmeier's Ten Predictions for 2010


Thoughts on Fannie Mae, forecloures, the FDIC, and more.

Editor's Note: This article was written by Richard Suttmeier, chief market strategist at, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.

Elizabeth Warren, the Top Cop of the Congressional Oversight Panel, tells it like it is.
She explained in a detailed report what I've been warning about since April 2006. How long have I been saying that nearly 3,000 banks have heavy concentrations in commercial real estate loans? It was more than 3,000 when I first talked about the domino failure scenario in April 2006, but it's now 2,988 troubled banks after 181 bank failures since the beginning of 2008.

Here's the score card I've been revising and presenting in recent ValuEngine FDIC Reports:

Excluding the fourth quarter of 2009, Total Assets in the banking system are down nearly $600 billion.

I'm not alone. I guess I should send Elizabeth Warren a Valentine's Day Card?

There are six types of categories of bad loans that total $5.8 trillion.
When the fourth-quarter FDIC Quarterly Banking Profile is released later this month, these loans will continue to be deteriorating.

Since the end of 2007 when "The Great Credit Crunch" began, 1 to 4 Family Residential Mortgages on the books of our nation's banks is down $317 billion with more defaults on the way. Here's the latest graph of serious delinquencies. These are the mortgage loans that weren't securitized.

Nonfarm and Non-Residential
real estate loans haven't yet begun to decline, but they will, and this real estate loan category totals $1.09 trillion. These are typically owner-occupied properties.

Construction and Development loans were the first to falter and are down $137 billion since the end of 2007. The first phase of these loans were "Dirt Loans" that paid for those cleared developments that now lay dormant with street outlines and vacant home sites that are "utility ready." The shovels are still in the ground, but no digging is going on.

Commercial Loans
are commercial and industrial commitments that are down $163 billion since 2007.

Home Equity Loans and Credit Card debt continue to deteriorate as well.

As banks foreclose the underlying collateral of land, buildings, and homes, etc., they become Other Real Estate Loans and this category is up 206% since the end of 2007.

On Thursday, Elizabeth Warren told Fox Business that Commercial Real Estate losses indicate risks of financial stability, and thus in my opinion she extended "The Great Credit Crunch" through 2014. I agree with her completely, but believe that the problems are deeper than she thinks.

According to the COP:

"Commercial real estate loans made over the last decade - including retail properties, office space, industrial facilities, hotels and apartments - totaling $1.4 trillion will require refinancing in 2011 through 2014."

"Nearly half are at present 'underwater,' meaning the borrower owes more on the loan than the underlying property is worth."

"While these problems have no single cause, the loans most likely to fail are those made at the height of the real estate bubble."

The cause is the fact that the US Treasury, Federal Reserve, and the FDIC floated regulatory guidelines for C&D and CRE loans in 2005 and formalized regulatory guidelines in December 2006, but never enforced them.

The Panel found that:

"...a significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American."

"When commercial properties fail, it creates a downward spiral of economic contraction: job losses; deteriorating store fronts, office buildings and apartments; and the failure of the banks serving those communities."

"Because community banks play a critical role in financing the small businesses that could help the American economy create new jobs, their widespread failure could disrupt local communities, undermine the economic recovery and extend an already painful recession."

It's a case of ignoring the foundation of the problems on "Main Street" while bailing out the Fat Cats on "Wall Street."
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No positions in stocks mentioned.

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