Given the growing default rate for home mortgages, will banks' balance sheet be affected?

Question

Banks have a lot of experience with projections of income based on fixed-rate mortgages. But do/did they have enough experience to be able to predict the income from the very, very large number of unconventional mortgages? Given what they know now, do you think they would have projected the same income?

Answer 1

In the long run, it would be very, very difficult for the mortgage lenders to "suffer" as a consequence of defaults. Lending money to someone for a period of ten, fifteen or thirty years is a "self-smoothing" function all on its own, regardless of the prevailing rates, the bulk of a mortgage lenders cashflow is coming from loans that began making payments between 1 and 30 years ago, so it all evens out. Mortgage payments always end up providing the lender with far, far more than the underlying value of the property, but worst case scenario, the lender owns the house and sells it to someone else!

The only real impact is on shareholder equity of the lenders corporation, which is important, of course, but most real investors have a longer view.