BAC had a much larger loan losses than expected. Non performing assets were $3.37 billion vs $1.67 billion the previous year. Since BAC is regarded as one of the best run banks in the country, it shows that loan deterioration is happening at a quickening pace.
Now it's apparent that residential housing caught the banks off guard, and they'll say the same when it comes to commercial loans. Loan losses are accelerating for one simple reason. A typical homeowner will do his best to hold on to his home, until he throws in the towel. It's easier to throw in the towel, when your equity disappears. The home equity losses are appearing even faster because of "short sales" in a home.
Assume Joe sixpack in 2005 had a $300,000 house. He had a mortgage of $225,000 and an equity line of $50,000. That house is now worth $225,000 but will sell for less than $200,000. The equity line is a total loss, and their will be a 20% hit on the mortgage also. An investor or a buyer, will offer to buy the house for $175,000 even though $275,000 is owed. The bank eats the loss, and the homeowner "short sales" the home. The short sale only stays on his credit for two years, and the tax implications of this are negotiable.
Banks got stuck on dummy mortgages; now they are getting stuck on funky short sales. Home prices need to go up, for this mess to stop, and the FED understands the problem when their banker buddies continually take hits on their balance sheets. When the homeowner was getting hit, things were "contained." When the bankers get hit, it's contagion.
Thus the FED cuts in October, and they do 50 basis points. That is not in the market.