Friday, May 8, 2009


Here's an interesting article on home foreclosures. In a few words it explains how banks and the investors who hold the securities that come from home mortgages prefer to hold on to bad loans rather than renegotiate them. It's pretty interesting. Their rationale is that if they renegotiate a $400,000 loan to, say, $300,000 they and other market players will lose money.

They don't care that they are the beneficiaries of the greatest bailout in human history. They don't care that the Obama administration has provided generous gurantees and write-offs because they screwed things up so bad. They don't care that homeowners can continue to stay in their homes. They don't even seem to recognize that they brought much of the market's collapse on themselves by offering home buyers "novel" home loans when they had no income, no job, and no assets (the NINJA loans).

What the banks and other market players are concerned about is that if they reduce the amount of the loans they have on the books they will have to write down their total assets.

... Since mortgages are listed on the banks' balance sheets at the value of the original loan, if they complete a short sale they must record a loss on their balance sheets. That would explain why banks drag the process out as long as possible.
The article explains that banks and other market players are doing this because of the dynamics behind the Collateralized Debt Obligation (CDO) market. This is probably true (read the article to understand the CDO market). However, in my view, banks and other market players are also not willing to renegotate because they are, incredibly enough, holding out for something better.

Banks and market players (who think they're investors) are holding out for a Green Light that will allow them to revalue all the toxic loans (and securities) along, say, a four year average. In a few words, they think that by keeping bad loans on the books at, say, $400,000 they might be able to have them averaged up to $450,000 (or more) because the value of the contract (security/loans) may have once hovered around $600,000 over the past four years.

If you're having trouble figuring out why it might work out this way, think about the value of your home. It might be worth $325,000 today, but it might have been worth $600,000 two years ago. Can you imagine being given the option of selling your home today at its four year average (let's say $450,000) rather than it's market price today? Sweet deal, huh? Why in the world would you reestablish the value of your home to $325,000 when you could hold out for $450,000? This is exactly what the bankers and security holders (which hold thousands of mortgages just like yours) see, and want.

All of this is made possible by a nice little provision that was inserted into the first 2008 bailout (TARP I). I'll discuss this on tomorrow's program.

- Mark

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