A drop in the bucket ... for them

One of the relatively few reasons that the third subscription renewal notice from BusinessWeek still sits here on the desk awaiting a final disposition is Finance and Banking Department editor Mara Der Hovanesian.

Like most print magazines, BusinessWeek starts sending renewal notices about nine months prior to expiration with urgent pleas to lock in low rates and such. So far, the latest notices have just replaced the previous ones in a sort of "checkbook limbo" waiting to see if a decision will be made before the "termination" notice in June.

Author of last year's "How Toxic is Your Mortgage" and March's story on First Fed which was augmented here in A Story in Need of a Few Charts, Mara's writing has been consistently unconventional in what is mostly a very conventional publication.

She made a guest appearance at the BusinessWeek real estate blog yesterday and again provided reason to stop and think.

I’ve been thinking about the diverging fortunes of big banks in the business of mortgage lending and lowly American homeowners. At a stylish midtown Manhattan hotel I recently sat down to breakfast with a CEO of one of the top 10 largest banks. “So what is going on with all these mortgages and the housing market?” I pressed. “How is this all going to shake out?”

This particular bank has, like others, been expecting losses post-housing boom and has stepped up reserves to make up for the problem loans. “Oh, I’ve seen this all before,” said the career banker. “We always have some losses, but it’s contained. The banks are going to be just fine. In fact, I see business picking up by summer.”

I rephrased the question: “I’m not talking about the banking industry,” I clarified. “I’m talking about the people. What’s going to happen to all the borrowers?”

“The borrowers?” replied this button-downed banker. “Oh, they’re screwed.”

Second-quarter earnings reports are streaming in from Wall Street firms and big banks, and they’re for the most part reporting that the mortgage mess is contained. Take Merrill Lynch, which reported growth in revenues from almost all its divisions—-except mortgages. Merrill’s CFO Jeffrey N. Edwards says if you added up all of Merrill’s originations, securitization, warehouse lending, trading and servicing revenues, both directly in the bank’s subprime business as well as its derivative business involving subprime loans, including all the retained interests, then revenues from subprime mortgage-related activities comprise less than 1% of the firm’s net revenues for the past five quarters.

That's a drop in the bucket for Merrill. And it apparently is a drop in the bucket for Goldman Sachs and Bear Stearns and Chase and Citigroup as well, according to their earnings conferences. But what may be a rounding error to these enormous institutions amounts to real numbers for millions of people who are on the precipice of losing their homes.

So while many lenders report that they’ve sidestepped the mortgage mess after making a mint during the boom, let’s not forget that they have the luxury of diversified sources of income and capital cushions and loan-loss reserves. They have the money to take calculated risks on a sector like housing when it’s white hot. And many funded loans to satisfy the demand of their investors for mortgage securities that would pay a handsome yield.

In the meantime, while each individual bank may have played only a partial role in the excesses that are resulting in so many foreclosures, the drops in the bucket are adding up to a very large pool of homeowners who are now very much underwater.

The moral of the story?

Neither a borrower nor a lender be, but if you have to choose one, be a lender.