Those who've stop paying mortgages for whatever reason, have found that doing so can be quite a boost to monthly cash flow. Due to FASB's suspension of mark to market accounting, banks have been in no rush to foreclose on delinquent loans so as to protect their reported earnings and bonuses. Defaulting loanowners have found that they can often live in the house for well over a year or more -payment free. Strategic default is a lucrative financial opportunity for bubble era loanowners that know how to do basic math and can see the proverbial writing on the wall.
Despite the rather quiet and convenient understanding created between banks and those who've stopped paying, it appears that like all good things, this situation is about to come to an abrupt end. Banks are starting to realize that as home prices continue to fall, they are only delaying the inevitable, and they are locking in larger losses than if they'd foreclosed promptly as bank regulators used to require:
"By postponing the date at which they lock in losses, banks and other investors positioned themselves to benefit from the slow mending of the real estate market. But now industry executives are questioning whether delaying foreclosures — a strategy contrary to the industry adage that "the first loss is the best loss" — is about to backfire.
Officially, of course, this problem shouldn't exist. Accounting rules mandate that banks set aside reserves covering the full amount of their anticipated losses on nonperforming loans, so sales should do no additional harm to balance sheets. Now there is widespread reluctance to test those valuations, an indication that banks either fear they have insufficient reserves or are gambling for a broad housing recovery that experts increasingly say is not coming.
"The math doesn't bode well for what is ultimately going to occur on the real estate market," said Herb Blecher, a vice president at LPS. "You start asking yourself the question when you look at these numbers whether we are fixing the problem or delaying the inevitable." Blecher said the increase in foreclosure starts by the GSEs "is nowhere near" what is needed to clear through the shadow inventory of 4.5 million loans that were 90 days delinquent or in foreclosure as of July.Defaulted borrowers were spending an average of 469 days in their home after ceasing to make payments as of July 31, so the financial attraction of strategic defaults increases. One possible way banks are dealing with that last threat is through what O'Toole calls "foreclosure roulette," in which banks maintain a large pool of borrowers in foreclosure, but foreclose on a small number at random.
O'Toole said the resulting confusion would make it harder for borrowers to evaluate the costs and benefits of defaulting and fan fears that foreclosure was imminent."
Meanwhile, back at the ranch...existing home sales and inventory levels are looking eerily similar to what we saw in the early 1980s, and our employment situation is now just as bad if not worse:
Mortgage rates set yet another record low today. How long until folks can buy a home with 0 down at 0% interest? How far will the privately owned Federal Reserve Bank push EZ monetary policy to maintain current asset values on the balance sheets of the Too Big To Fail banks?
Is America better off buying cheap homes with expensive money, or expensive homes with cheap money? What will our dollar buy? What will the price of imported oil be in either scenario? Ponder those questions for they are very real in the here and now, and they all have very real consequences for our economy, our currency, and our country.
Severe currency devaluation would be required to maintain today's asset values. Severe losses on leveraged bank assets (real estate loans) would be required to maintain today's purchasing power of the US dollar.
Rock...meet hard place.
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