Foreclosures Hit Record High - Up 28%

The WealthCycles Staff

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.

Since the US Government thinks large US banks, FMae and FMac are "too big to fail", the House of Representatives and the Senate will perpetually bail them out, injecting their balance sheets with more borrowed money from the Fed, which US taxpayers pay back ultimately through inflation and loss of purchasing power (why do you think gas is double what it was 4 years ago?). When you see those homes just sitting there in your neighborhood and rotting, you can thank the US Govt for instilling a false sense of security to its citizens, creating a false floor for housing prices.

I feel bad knowing that families have to give up on there home. The most sacred place for anyone. This truly leaves a scar for life. I speak from first hand experience :(

@James It's a catch-22. The banks have so many foreclosures already on their books that if they release them it further depresses the market and subsequently their balance sheet...

Yes, it affects bank balance sheets in 2 ways:

1. The direct MTM hit from the loan loss. (deflation)
2. The increased supply further depresses prices, lowering the value of the performing loans remaining on their books.

What I do not understand is why are banks delaying foreclosures  and preventing homes from going up for sale in the real housing market?

James
Florida

Because once they allow the homes to go up for sale, they need to recognize the losses that have accrued on their balance sheets—which will drive the banks' stock prices down. 

—Mauricio

But if they wait a lengthy period of time, isn't there a good chance that the home will deteriorate, resulting ultimately in a much lower sale price? Also, the banks must be aware that the housing market is only headed down, so they are ultimately shooting themselves in the foot, so it seems. At some point, you have to pay the piper. Is the game to be the last one to fall?

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