Shares of Washington Mutual, rose 6.2 percent as that company reported a $3.3 billion loss. Investors cheered even though Washington Mutual said a record number of borrowers were unable to keep up with mortgage payments.
Fifth Third Bank and KeyCorp, two lenders based in Ohio, fell short of analysts’ earnings estimates and posted big losses, but their share prices shot up, too. SunTrust Banks of Atlanta reported a 21 percent drop in profit, reflecting bad real estate loans. No matter. Its stock rose 16 percent after telling investors it would not need to raise capital after selling its stake in Coca-Cola.
Longtime industry executives warned that investors may be getting ahead of themselves.
“The market believed that this bad news was going to get dramatically worse — quickly,” said John Kanas, the former chief executive of North Fork Bank. “The bad news is going to get dramatically worse, but it will take time.”
For many banks, the housing crisis is entering a new — and potentially even more dangerous — phase. The problem is no longer subprime mortgages or complex investments tied to them, but rather the slowdown in the economy, which will make it more difficult for companies and consumers to keep current with their creditors.
Banks are pulling back. In the last six weeks, lending nationwide has remained flat after peaking at a record high, according to Federal Reserve data.
“We’ve gone from a credit crisis to a credit crunch,” said Ed Yardeni, chief investment strategist of his own research firm. “It could be more damaging to economy than it has so far.”
The recent bath of bank results underscored that many borrowers are in trouble already. Wachovia reported a sharp rise in defaults on so-called pay-option mortgages that were a hallmark of the housing bubble. Plunging home prices, particularly in Florida and California, have left 14 percent of the bank’s customers with zero or negative equity in their homes. Wachovia’s big portfolio of commercial real estate is suffering losses too.
The problems extend beyond well beyond housing. Delinquencies on auto, credit cards, and home equity loans have worsened across the industry. Even affluent people with sterling credit scores are falling behind on payments, as results this week from American Express showed.
Once people fall behind, “the likelihood that they will make good on the debt is much lower than it has been in the last five to 10 years,” said Michael Poulos, a financial services consultant at Oliver Wyman in New York. “If we have significant unemployment or a recession, that is what I would worry a lot about.”
Commercial loans may be a ticking time bomb. Bank of America showed a sharp increase in charge-offs related to small business loans this quarter. But bigger companies are increasingly squeezed.
“Up until this quarter, the majority of all the credit problems have been tied to one single issue: the decline of residential housing market,” said Gerrard Cassidy, a banking analyst at RBC Capital Markets. But if unemployment and the economy worsen, “then you are talking a traditional recession and the effects it has on commercial loans.”
Robert K. Steel, a former under secretary of the Treasury who recently became the chief executive of Wachovia, offered a measured assessment of the industry’s prospects on Tuesday.
“The reality is that we are really in challenging times in terms of the economy, housing, and financial services,” Mr. Steel said. “I can’t tell you that the improvement will be smooth and continuous, and the odds are high there will be new challenges that we will have to face.”