The housing market comprises the asset base of the banking and financial system. When home prices fall, the loss is not marked-to-market price, as the hit to lenders is taken when the foreclosure process is completed.
With the new year comes the annual promises of a housing recovery. As we reported on the 2012 outlook here, prices have continued falling. The Mortgage Bankers Association just reported the 5th consecutive decline in mortgage applications. Institutions should get used to their new role as a property manager, or take some of the hit now from their mélange of non-performing loans as opposed to continuing to extend and pretend, building up final write-downs.
Banks had better be ready, because according to the latest from Lender Processing Services, foreclosures have risen to an all-time high for the month of January, up 28%!
This means more homes will be added to the 3+ million homes that are presently part of the "shadow housing market," houses on which banks are delaying foreclosures and preventing from going up for sale in the real housing market.
As this process takes place, it adds to the glut of extra homes our nation already has to offer buyers, pressing prices even lower. The lower prices further impair the "assets" of the banks.
This not only effects institutions, but also underwater homeowners, who may not choose to continue to pay monthly payments as equity falls far behind the massive burden of the loan. Loan to Value (LTV) metrics below show that the homeowners who are underwater are desperately in the red, describing a higher likelihood of the homeowner simply walking away.
LTV is also instructive in that the bigger the loan losses incurred in relation to the home value, the worse the losses will be for banks and mortgage owners. The bottom line is that the housing correction is far from over, as the collapse has been artificially slowed through vigorous expansion of credit. The true losses laid out above eventually will manifest themselves, shuttering all but the most prudent banks across the nation if the Fed does not do more, and soon, to remove these toxic assets through further “purchases,” covertly bailing out banks--or worse, both.