Wednesday, April 15, 2009

The Foreclosure Crisis

The Lehmann Letter ©

Today’s Wall Street Journal carried a grim story by Ruth Simon: http://online.wsj.com/article/SB123975395670518941.html#mod=todays_us_page_one .

Banks Ramp Up Foreclosures

“Some of the nation's largest mortgage companies are stepping up foreclosures on delinquent homeowners. That will likely lead to more Americans losing their homes just as the Obama administration's housing-rescue plan gets into gear…..

“Some mortgage companies had stopped foreclosing on borrowers as they waited for details of the Obama administration's housing-rescue plan, announced in February, which provides incentives for mortgage companies and investors to reduce borrowers' payments to affordable levels. Others had temporarily halted foreclosures while they put their own programs in place, or in response to changes in state laws.

“Now, they have begun to determine which troubled borrowers are candidates for help, and to move the rest through the foreclosure process.

“The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off.

“Some of the mortgage companies are themselves receiving funds under the government's financial-sector bailout, which could make their actions politically sensitive. But mortgage companies say they are taking steps to keep borrowers in their homes, and are only resorting to foreclosure when there are no other options……….”

The article goes on to provide additional detail and comment.

It’s all very sad on a number of levels.

First and foremost, millions of families and their lives are being uprooted and disrupted. It’s true that some were gullible and others were culpable. But it’s also true that the mortgage originators share the blame.

Secondly, the entire economy suffers because the residential-real-estate collapse is at the heart of the economic crisis. The bubble burst in 2006, initiating an asset deflation and recession that continue to engulf us and will continue to do so for some time.

Some say that the residential-real-estate market must touch bottom before it and the economy can recover. True enough. But wouldn’t it be better for the banks to continue to work with the federal government to keep the largest possible number of homeowners in their homes? Even if the government can’t save the banks completely harmless when they re-write stressed mortgages, the re-write may still be superior to foreclosure. If it’s not, why don’t the banks urge amended legislation that they could live with: Legislation that could stop the foreclosures and protect the banks. That way the residential real-estate market could touch bottom at a higher level, and spare everyone from a deeper than necessary recession.

© 2009 Michael B. Lehmann

1 comment:

Zach said...

It seems there is a conflict of interest in some respect. If the banks for all intents and purposes have their liabilities guaranteed by the taxpayer, which it appears they do now, then I would think there would be little incentive to work with homeowners.

If the banks had to "cram down" mortgage principal it would be a hit to their B/S. Instead the bank can take over the home and leave it on their B/S at a higher value than it is worth. Ultimately it doesn't matter as collectively the bank would still have a bad asset with huge liabilities; however, their B/S would appear stronger if they foreclosed. If their B/S is stronger I would assume it will be easier to get capital injections (private and public), as well continue to inflate values for shareholders and enrich management.