A number of analysts believe that there can be no recovery in bank earnings and share prices as long as the housing market is troubled.

If that opinion is right, new foreclosure data paints a gruesome picture.

According to Reuters, "Home foreclosure filings during the second quarter were reported on 739,714 U.S. properties, up 121 percent from a year earlier, RealtyTrac, an online market of foreclosure properties, said in a report." By some estimates 25 million American homeowners now owe more on their mortgages than their homes are worth.

The information on the real estate markets severely undermines the belief that the worst may be behind banks. Some optimism that second quarter earnings marked a bottom has moved financial shares up over the last week. That rally fell apart yesterday with some bank stocks off over 12% and Fannie Mae (FNM) and Freddie (FRE) dropping nearly 20%.

Most shares in large banks now trade at 25% to 30% above the lows they hit a month ago. The phantom notion that earnings and balance sheets might improve should quickly lose its power.

Bill Gross, bond management genius and head man at Pimco, has recently written that the total write-offs for the mortgage disaster will total $1 trillion. At most, half of that has made it though the financial system.

Bank stocks are not only likely to move back to their lows, they are likely to break well below them. New write-downs which could total tens of billions of dollars at money center banks will make it necessary for them to raise new capital. More dilution is afoot and it cannot be prevented.

Big financial firms will be back in the market for more capital, perhaps much more than they have had to raise to date.

Douglas A. McIntyre

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