As with past cycles, the failures are primarily being driven by insolvencies as bad loans mount and equity capital is depleted, leading to liabilities exceeding assets. Banks that were heavily exposed to residential mortgage and construction loans have experienced the bulk of the increasing defaults and mounting losses on nonperforming loans.

"The primary sources of weakness have been from the residential housing sector, both from sharply higher default rates on single family mortgages and from soaring defaults on residential construction loans," states the report. "By our estimates, more than 90% of the housing markets in the US have experienced price declines. Prices in some markets are off by 60% to 70% from their peaks."

Liquidity issues have emerged as well, also in keeping with past cycles, with deposit outflows driving or accelerating some of the closures. "These bank runs are self-fulfilling to some extent--with large amounts of cash being drained from an institution, an otherwise solvent bank can quickly become insolvent," states the report.

Regardless of the reason, Foresight principals Matthew Anderson and Susan Persin are predicting that an additional 82 bank failures through the third quarter of 2009. That would take the year-to-date total to 95 and the total since September 2007 to 122.

This forecast is mainly the result of deteriorating loan performance and the recent rapid increase in the size of Foresight's Watch List, which swelled to 275 banks as of the end of the year. "Lacking the prospect of a quick turnaround in property markets, the already worrisome levels of distress among many banks, including those on our Watch List, will likely intensify," Persin and Anderson report.

With California having already experienced a significant number of failures, they predict that most of the bank failures will occur in the Southeastern and Southwestern US--areas other than California most impacted by the housing boom and bust--and the economically depressed areas of the Midwest. In the Midwest, they expect the greatest numbers of failures in Illinois, Minnesota and Michigan. In the southeast, Georgia and Florida are at the top of the list.

Moreover, Anderson and Persin say government efforts to support the financial sector likely will have little direct impact on their projections of additional failures because "most of the government efforts so far have focused on assisting either larger, systemically-important banks or banks with lower levels of distress in their loan portfolios."

The current cycle of bank failures began with the closure of NetBank in Alpharetta, GA, in September 2007. The closures have ranged in size from the $19-million Hume Bank to the $307-billion Washington Mutual.

Foresight estimates that the FDIC currently has more than $50 billion in failed banks' assets. If its forecasts for bank failures prove accurate, that amount could rise to $100 billion. For investors targeting discounted and distressed real estate, Anderson says the situation could provide "a major source" of opportunities.

Instant Insights /

National Report: Bank Failures Accelerating

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