I have really been struck by how few properties are going back to the banks lately.? It looks like the vast majority just keep getting postponed month after month.? I watch the same zip code, day in and day out, and it is absolutely glacial in its change.? I was wondering if the banks?have been waiting for the new administration’s plan to deal with all of these bad loans they made, or if something else is going on.? And how do you think they’re going to handle all of these bad mortgages, now that the plan has been announced?
I think the banks are waiting for bailouts as you suggest – and perhaps they are also holding off on showing losses as long as possible so they can pretend to be solvent and keep paying the execs that run them.
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I don’t thing Geithner’s plan addresses the core problem of negative equity at all. All this focus on “getting credit flowing again” - when are they going to realize that too much credit got us into this mess. We don’t need more credit to get the economy going, we need to clean up the aftermath of excess credit.
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I expect that ultimately we will see the fact that 20% of US homeowners with a mortgage (30% in CA) have negative equity with a combination of the following:
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- Inflation. This in effect reduces debt, but to truly fix the worst loans it would require sufficient inflation to double or triple wages. That won’t be fun.
? - Debt elimination. Currently foreclosure and short sale are the only mechanisms that are eliminating debt. When things get ugly enough and they realize you can’t fix too much debt by “getting credit flowing again”, I expect we’ll see principal balance loan mods, bankruptcy cramdowns and perhaps even some form of nationalized debt jubilee.
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In the mean time, I expect things to pick back up at the steps soon. Numbers were way down in March, but this lines up well with the drop in Defaults back in Q4 due to Senate Bill 1137.
I guess ultimately, there has to be a reckoning with the bad loans, which I hope, for the sake of all of the buyers watching and waiting (including myself), will bring prices down to reasonable levels.?
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I might be way off base, since none of this stuff is my strong suit, but I thought I?heard several weeks ago that under Geithner’s plan the banks now are allowed to value the foreclosures on their balance sheets in a much more favorable manner.?? Whatever it is, I was just wondering if this new accounting method was introduced to deal with this supposed tidal wave of option arm and alt a defaults that we keep hearing about.? I’d love to know what you think about that.
I think what you are talking about is the restating of FASB rules around accounting for distressed assets. The popular belief is that it will allow banks to value the potentially toxic mortgages (seriously underwater, but the owner is still making payments) based on their long term value, rather than what they can be sold for today. ? In any case, it is clear to me that most banks in the US are insovlent if you mark their assets to current values. If ultimately you believe home values will return to 2006 levels (I don’t), then this is ok. Otherwise this only delays the day of reckoning and extend this crisis for years longer than should be necessary.
Here’s an article on the FASB “change”: http://www.dsnews.com/index.php/home/news_story/2803 ? The notion in the article that mark to market caused our current problems is farcical. The reality is that banks have made trillions in bad bets they don’t have the collateral to cover. Sure, allowing them to claim on paper they have more assets then they really do will prop them up temporarily - but doing so only delays the inevitable. If you have cancer, it is better to attack it full on then treat the symptoms.
Thanks for the link, Sean, that article explains it pretty well.? There’s a comment in there that reflects what you’re saying - now that they’ve gotten this more flexible way to value these assets, there’s already talk that its impact is ultimately minimal.??
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I guess I’m now hoping that the predicted defaults are going to push prices lower (buying is up in my area), and I worry that the government will do whatever it can to help out the banks and keep prices artificially high.? So when I heard about some accounting rules changes for banks, right away I figured it had something to do with lessening the impact of the Option ARM and Alt A defaults that everyone keeps predicting.?
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Thanks for explaining that, Sean.? I love your site.?