Chances of an economic hit this fall? High.

In trying to predict the result of the November elections, one tries to forecast what's likely to happen to the economy.  Here ya go:

At the end of the fourth quarter of last year the FDIC had 52 banks on its stress watchlist. At the end of the first quarter of this year that total rose to 63.  Those 63 banks are sitting on "unrealized losses" of $512 billion.  Any economic drops would likely push many of these banks into insolvency.

The assets comprising these unrealized losses fall into three categories----commercial real estate, residential real estate, and US Treasuries.  Let's start with commercial real estate:

As everyone knows, the Great Covid Lockdown demanded by Dem governors pushed workers out of the gleaming offices into working from home.  Once the plandemic vanished, companies realized they didn't actually need pricey downtown buildings, and that not renewing leases would save millions.

Ooohhh.

The sharp drop in rental income for owners of the gleaming office buildings meant owners couldn't make mortgage payments.  Increasing numbers of owners of commercial buildings have chosen to default because they can't cover the loan payments.

Billions of dollars in buildings have gone into foreclosure, with virtually no buyers.  But the banks have to continue to pay for security, utilities for a few remaining tenants, and...taxes.  Oh yes, cities aren't about to waive taxes just because banks are having problems.  So the banks are hit with a double: no income from defaulted loans, and having to pay new, unexpected costs.

Similarly, malls have been dying everywhere. This means rents are down—disastrously.  As the $1.2 trillion in notes come due, borrowers are forced either default or roll the loans over at higher interest rates--which the banks are happy to do.  But unless things change radically, this just postpones the inevitable default.  

When enough borrowers default, banks become insolvent.  Rather than declare that, and have to pay depositors, the FDIC has routinely looked the other way on many banks, hoping the economy will recover.  But it's hard to imagine this continuing for much longer.  The FDIC has a mere 2 cents for every dollar their "insurance" has pledged to cover.

Residential real estate:
  Except for the real-estate meltdown of 2008, residential real estate has long been a reliable cash cow for lenders.  Problem here isn’t lack of occupancy, but rather that except for "price-inelastic" markets like NYC and similar high-end cities, home sales are way down, due in part to high interest rates and an uncertain economy.  So people with low-interest loans aren't selling, and few are buying at the higher interest rates.

Why don't mortgage lenders knock a bit off the interest they demand for new loans?  Cuz that locks in lower income for up to 30 years.  "But isn't making a few more loans at a fractionally lower rate better than fewer loans at a higher rate?"  Um...nothing to see here, citizen.  Move along.

Both types of real estate are starting to push the 63 at-risk banks closer to insolvency.  The question is whether the FDIC will be forced to play by the normal rules before the election, or will avoid taking over technically insolvent banks before the election to protect the Democrats.