26 September 2009

When banks can’t afford to foreclose

Evidence of bank tardiness in foreclosing on delinquent borrowers is continuing to mount. The author of a recent blog posting on the growing “shadow” inventory of foreclosures is getting very close to identifying the real reason lenders are reluctant to actually take possession of homes with delinquent mortgages.
Banks make more money by NOT foreclosing on homes. Banks are dragging out the
foreclosure process for their own selfish reasons. Until the day they foreclose, the amount of money owed to them is an asset…sure, it’s an asset that isn’t paying interest payments…but it is still an asset. The day they foreclose, a $400,000 asset
could become a $150,000 asset and a $250,000 loss.

All this is true, but the bigger point may be that lenders simply can’t afford to take the financial hit to their books that a foreclosure requires. My suspicion is that many lenders are in such dire financial straits as it is, that taking even more write-downs will force them into insolvency. This seems to be the pattern of dealing with the entire financial crisis: delay taking necessary actions, and pray that somehow asset prices will recover.
During my trip to Florida I heard about families who have lived in their homes as long as two years without paying, because the banks haven’t gotten around to foreclosing. And that’s a problem. Until the real estate market recognizes all its losses — including accounting for all foreclosures — it won’t be able to regain real stability and move on. Of course, that has implications for the broader economy as
well.

As of July, mortgage companies hadn’t begun the foreclosure process on 1.2 million loans that were at least 90 days past due, according to estimates prepared for The Wall Street Journal by LPS Applied Analytics, which collects and analyzes mortgage data. An additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the lender hadn’t yet acquired the property. The figures don’t include home-equity loans and other second mortgages

Moreover, there were 217,000 loans in July where the borrower hadn’t made a payment in at least a year but the lender hadn’t begun the foreclosure process. In other words, 17% of home mortgages that are at least 12 months overdue aren’t in foreclosure, up from 8% a year earlier.
With each passing day it is looking more and more like the US is following Japan down the path of deflation. Just as Japan’s decision to avoid taking the sharp pain of letting banks fail, and write-off bad loans, led to 20 years of zombie banks and corporations, America is doing precisely the same thing, but on a grander scale.

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