US banks' loan losses will drag into 2011 -Moody's

NEW YORK, March 10 (Reuters) - The housing bust will take an extra year to play out for U.S. banks as loans continue to sour but at a slower pace than previously expected, Moody's Investors Service said on Wednesday.

Moody's latest report on the U.S. banking sector maintains the credit rating agency's forecast that the banks it rates are facing $536 billion of loan charge-offs, or the losses banks declare on loan books when they give up on the chance of the loan being paid back.

Yet instead of these charge-offs happening over three years from 2008 through 2010, Moody's now forecasts these will stretch out for another year into 2011, said Craig Emrick, a senior credit officer with Moody's covering U.S. banks and finance companies and the lead analyst who wrote the report.

"The charge-offs haven't come through as fast as we thought they would," Emrick said. "Mortgage modification programs have had an impact," he said, together with the continuing decline of the commercial real estate market.

Government efforts to get banks to cut homeowners more slack who are having trouble making their regular mortgage payments have resulted in modifications to make payments more affordable, thus keeping some loans from turning bad, for now.

"Moody's credit outlook for the U.S. banking industry continues to be negative," the report said.

Smaller banks in particular are being hurt by their rapidly deteriorating commercial real estate portfolios, Emrick said.

The U.S. banks Moody's rates have already charged off $240 billion of loans over the past two years, with $296 billion yet to come, the agency forecasts.

Another potential negative for U.S. banks would be draft legislation, if it were passed, on resolution authority or the procedure for winding up banks and bank holding companies if they fail.

If a bill were to become law that would force unsecured creditors to take losses when resolution authority is used, such a law would likely have affect Moody's ratings of some banks, Emrick said. (Reporting by John Parry; Editing by James Dalgleish)