The Terrifying, No Good, Very Bad News for the Banking Sector

I'm not much of an "I told you so" type of guy, but I can't help it because in this case I told you so at least a handful of times.

I told you so
Data released yesterday by credit agency TransUnion showed that the delinquency rate of homeowners who are more than 60 days behind on their mortgages rose for the first time since late 2009. The 6.44% delinquency rate for the June to September period marks a very large jump from the 5.88% rate reported in the year-ago period and the 5.82% reported in the second quarter.

While TransUnion wouldn't comment on the specifics about why the delinquency rate is rising, Tim Martin, group vice president of U.S. Housing for TransUnion, attributed it to a melting pot of the U.S. credit downgrade, U.S. and European debt crises, and the volatile U.S. stock market.

Seriously, I did tell you
I, however, have a completely different set of reasons why mortgage delinquencies are once again on the rise.

First, a heavy slug of undocumented income, or Alt-A, loans are scheduled to have their mortgage rates reset in 2011. There were considerably more Alt-A loans underwritten than subprime loans three years ago, so even with banks better capitalized than they were three years ago this trend is very concerning. It's still uncertain if homeowners can meet their debt obligations, especially in an environment where unemployment remains steady at 9%.

With data from most major banks being downplayed, it may have slipped under the radar, but September saw rising credit card delinquencies from nearly all major U.S. financial institutions including JPMorgan Chase (NYS: JPM) , American Express (NYS: AXP) , Discover Financial (NYS: DFS) , and Bank of America (NYS: BAC) . I'd be especially concerned for a company like Capital One Financial (NYS: COF) , which is intricately tied to the credit card markets, more so than any other large bank. A degradation in the creditworthiness of its customers could easily affect that company's bottom line.

As much as we don't want to make a big deal about housing prices, the S&P Case-Shiller housing price index, which is down 5.9% year over year, continues to tell us a tale of woe. With little incentive to continue making payments on drastically underwater homes, some homeowners are still choosing to walk away rather than deal with the arduous process of renegotiating their loans.

Even refinancing and mortgage activity has been spotty at best despite rates that trended near 60-year lows. A recent 30-basis-point surge in 30-year mortgage rates was enough to send new mortgage applications tumbling by nearly 15%. Consumers are becoming hypercritical of interest rate moves, which could bode poorly for banks.

Finally, data from the homebuilders themselves speak to the level of pessimism built into the sector. Neither KB Home (NYS: KBH) nor Beazer Homes (NYS: BZH) has been able to turn a full-year profit since 2006, and much of the sector remains underwater without the assistance of the U.S. government.

Cue the fire?
Consumer confidence is dancing around two-and-a-half-year lows, credit card and mortgage delinquencies are rising, and housing prices are falling. Now all we need is Nero to play the fiddle and the scenario is complete.

Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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