Homeowners with reasonable credit start to default, trouble for bank stocks

It was just a matter of time. People with poor credit have been defaulting on mortgage payment in large numbers for more than a year. Now the problem has moved to homeowners with reasonably good credit.

According to The New York Times, in April "delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent" from a year earlier.

The problem is going to get much, much worse. Many mortgages held by people with good credit have interest rates resetting at higher prices. The trouble is deeper than that. Higher energy costs and falling employments have a leveraging effect on the overall ability of many homeowners to keep up with their payments.

All of this means that write-downs of asset by big banks and brokerage firms may only be in early stages. The IMF has estimated that total write-offs among banks due to mortgage problems will hit $1 trillion. By most estimates only $400 million of that has shown up in earnings reports.

For investors in bank and brokerage stocks, the implications are that these firms will lose more money and have to raise more capital to bolster their reserves. That means more dilution.

Bank stocks have much further to fall.

Douglas A. McIntyre is an editor at 247wallst.com.