Several states do not allow investors or banks to pursue deficiency judgements against first mortgages. However, these investors can usually sue for a deficiency judgement on a borrower for a second mortgage.
Another subtlety which seems to be slowing foreclosures and motivating banks and investors to relegate homes in default to the shadow inventory is the delay of the implementation of the Financial Accounting Standard Board's implementation of mark-to-market accounting for some infrequently traded assets. (see the Wall Street Journal article titled, "Congress Helped Banks Defang Key Rule" June 3,2009 by Susan Pulliam and Thomas McGinty. And see, mark-to- market accounting on wikipedia)
Completing a foreclosure would force the bank to reprice the asset (mortgage) or sell the property at true market value.
It makes one wonder about the effect of such repricing on bank balance sheets, and the true fractional reserves of banks with significant mortgage holdings. It also makes one wonder how mis-stated the financials of other big mortgage investors (like pension funds) might be.
The squatters are helping the banks and investors by preventing looting and vandalism. And, as long as they stay in the home the property taxes, homeowner fees and municipal assessments are (arguably) still their obligations. The mortgage lender isn't the property owner until the foreclosure is complete.
Banks and investors seem to have decided to wait out the bad market. But, the question is, will the market recover with the uncertainty caused the huge overhanging shadow inventory. . . .
Editor note: Mark to market means carrying an asset on the books at current market value. This means just because the wrote a mortgage at $200K and the market is now $100k for the asset, they now have to show the market value not the original mortgage amount. Another accounting standard is the
"lower of market or cost" of goods in an inventory situation. Banks and mortgage institutions have been allowed to stall a bit on valuation of mortgages and this means their balance sheet assets may not be as high as they would like us all to believe.
Banks are counting on people sticking to the terms of their mortgages. If the economy doesn't turn around and people with jobs heretofore immune to layoffs and bankruptcy continue to sprial downward we could have another banking crisis. Mortgage debt worth nothing and empy houses all over the place.
ReplyDeleteIf they had to "mark to market" the value of all their mortgage receivables we would already be in another banking crisis.
People are more than a little worries about the state of our economy. It appears to be a worldwide slump with no end in sight. Now we hear Congress is cutting off the life line of people on unemployment this will only add to the human misery brought on by greedy bankers and wall street tycoons.
ReplyDeleteIt didin't take a genius to figure out no doc and stated earnings apps for loans was a big lie to keep the bubble inflated as long as possible.
If the banks can't unload all the foreclosed property in a reasonable time frame what happened today on wall street may be a taste of what the future holds for all of us.
Mr. Alldredge: Thank you for posting my comment (above) about squatters in default and the shadow inventory in your blog. It seems many real estate professionals don't seem to understand the banking side of the equation and therefore don't why banks are slow to modify or foreclose on loans. I believe that by not recognizing the size and the implications of the shadow inventory of homes makes it's difficult to accurately estimate how long the housing recovery will take. In Japan they called it the lost decade.
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