Banks Facing More Fallout From the Housing Crisis

Like the housing crisis, banks and other financial institutions may see things get worse before they get better.

Three top government officials--including Federal Reserve Chairman Ben Bernanke--signaled on Tuesday that the expanding housing crisis is likely to take an even bigger toll on banks.

And it's not just housing. U.S. Comptroller of the Currency John Dugan told Congress that banks are facing stress from credit cards, home equity loans and commercial real estate lending in addition to the subprime mortgage crisis.

"Although credit card earnings have been fairly robust and portfolios are currently strong, we have a heightened level of concern in this area, even before the numbers confirm any significant deterioration," Dugan told the Senate Banking Committee.

Fed Vice Chairman Donald Kohn joined the chorus, telling the same committee that the banking system faces numerous challenges from a housing downturn that is causing
asset write-downs and losses.

"The problems in the mortgage and housing markets have been highly unusual and clearly some banking organizations have failed to manage their exposures well and have suffered losses
as a result," Kohn said.

Citigroup , for one, is now expected to cut more than 30,000 jobs in the next 18 months, CNBC reported Tuesday. Also, the head of Dubai International Capital said that Citigroup will need additional capital.

Merrill Lynch cut its earnings forecast for Citigroup, saying it now expects a first-quarter loss of $1.66 a share, compared with its earlier view of 55 cents a share, amid $15 billion in writedowns related to subprime mortgages, theflyonthewall.com reported.

Several financial stocks, including Citigroup, hit notable lows on Tuesday, while the S&P Financial index broke through its January low. Citi, the Dow's top decliner, hit a nine-year low. Lehman Brothers and Freddie Mac also reached new intraday lows.

In a speech to regional bankers, Fed Chairman Bernanke said that because home foreclosures are expected to keep growing in the coming months, banks should take further steps to keep people in their homes, including lowering principal and interest payments.

Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal.

"They said that if they were to write down the prinicipal and house prices were to fall further, they could feel pressured to write down principal again," Bernanke said.

Still, "this situation calls for a vigorous response," Bernanke said.

Rising foreclosures threaten to worsen the problems in the housing market and for the national economy, which many fear is on the verge of a recession or in one already.

"Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods and the nation as a whole," Bernanke said. "Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should be, done," the Fed chief said.

One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding deliquency and foreclosure," Bernanke said.

With low or negative equity in their home, a stressed borrower has less ability -- because there is no home equity to tap -- and less finanical incentive to try to remain in the home, he said.

--Reuters and AP contributed to this report  

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