According to the Associated Press yesterday, it looks like foreclosures are starting to "stabilize":
Even as Americans suffer rising unemployment, foreclosure rates in three states hit hardest by the housing bust — California, Arizona and Florida — stabilized in June, offering hope that the worst of the real estate crisis is over, according to The Associated Press’ monthly analysis of economic stress in more than 3,100 U.S. counties.
Karl Denninger however has a different take. Here’s what he says of foreclosures: [Thanks M!]
You know full well that essentially every bank in the nation, including the largest ones that went through the so-called "Stress Tests", have been intentionally mis-marking loans "held for investment" at or near par even when there is essentially no chance these loans will be satisfied in full, and that this practice has been going on since the housing crisis began.
These include defaulted loans; there are literally millions of Americans that are living rent-free, right now, because their lender has sent out a NOD and then done nothing else, despite never paying another penny toward their mortgage.
Why is the bank doing this?
That’s not hard to figure out.
If the banks foreclose and sell the property then the sale price becomes the indisputable mark to market on that paper, and avoiding that mark is absolutely critical or these banks would be forced to recognize their own insolvency.
Thus we have people who live in their houses for more than a year with nothing more than a NOD in the mailbox, we have people who have had their homes foreclosed upon and then the bank has refused to perfect title (leading to stories in the media of foreclosed owners being chased for neglected upkeep, code violations and similar) and we have banks that have made a practice of bidding themselves in the foreclosure auction for the full mortgage amount, which of course is dramatically more than anyone else will pay for it. They wind up "owning" their own foreclosure but the paper remains marked at the full mortgage amount, since that’s what they bid, even though there’s not a snowball’s chance in Hell that any real buyer would pay anything close to that amount (evidenced by the lack of bids at or above that amount at the auction!)
I have repeatedly stated (and shown my work) that there was likely $3 trillion in total "bad paper" in the banking system in residential mortgages alone.
We know for a fact that recovery is running in the neighborhood of 40% (including both first and second lines) from those loans that have been followed through from default to recovery. We know for a fact that bid lists of defaulted second lines circulate all the time and trade literally at a few pennies on the dollar; thus, a second line behind a defaulted first loan is essentially worth zero.
We also know that about $1 trillion in bad loans have been written down thus far, which means there is two trillion more to go, and then we get to talk about commercial real estate where "extend and pretend" has even become part of the vernacular of the trade!
I believe that foreclosures are not "stabilizing". What is happening is that so many foreclosures have entered the pipeline, the drain has become clogged so nothing is flowing. As Denninger pointed out Sheila Bair of the FDIC has ordered banks:
The Federal Deposit Insurance Corp. said late Monday that banks should recognize losses on home loans promptly and warned that failure to do so could delay efforts to mitigate the financial impact.
Institutions must analyze the collectibility of the loans they hold for investment at least every quarter, the FDIC said in a statement on its Web site.
If that were to really happen the drain would unclog and the floodgates open.
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i’m curious as to why the banks (publicly traded anyway) haven’t reported more write downs. it’s a pretty simple accounting issue and should be EASY for the auditing firm to detect and adjust. when verifying loans receivable, the firm selects a sample. now in the past it has been easy to miss some as there were much fewer “past due” loans in the total receivable balance (and there’s always been an acceptable level of variance on financial statements). but now they should be finding significant past due payments. those are the items in the sample that a firm is to concentrate on. they are supposed to test the collectibility and if they determine it to be uncollectible then you write it down to worthless or the value they beleive will be realized. you then take the sample and if it’s, say, 40% off, then you adjust the entire receivable account down 40%. it’s just not that difficult. i predict a few BIG cpa firms will have some questions to answer 2-3 years down the line. i don’t know that you’ll see an enron/arthur andersen situation, but i do beleive there are some really bad audits taking place.
Now this is more like it.
If it weren’t for this blog, I wonder where I or many others would get something resembling the truth.
I was wondering how rising unemployment could lead to “recession ends” and “housing prices about to rebound” as the MSM keeps reporting lately. I guess I’ll have to listen closer to Obama’s press secretary to find out how that works.
“We also know that about $1 trillion in bad loans have been written down thus far, which means there is two trillion more to go,..”
Loan losses of this magnitude would offset any putative gains, as represented by the “stimulus package”. Since the stimulus was paid for with borrowed money, it will have to be repaid with taxes and/or debt depreciation via monetary inflation.
Monetary inflation will introduce a risk premium to borrowed money. Interest rates will rise. Financing a house will then become more costly. This will further depress the housing market.
In the end, we will be paying higher taxes while watching the value of our housing stock decline. Is this any way to structure a recovery?!
Preforeclosures skyrocked in my area in July. No one shopping for real estate even wants to see resales, I had to make an entire section on my website just for shortsales and foreclosures.
there are literally millions of Americans that are living rent-free, right now, because their lender has sent out a NOD and then done nothing else
He may be very correct about this. As I watch NODs and Foreclosures in Sonoma county, I see NODs growing, but foreclosures are not back to the levels of a year ago.
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