They also are saying they are seeing further softening toward the November numbers. And they are hearing from the Realtors they talk to that the re-default rate on a lot of these loan modifications are running at 50% - that is half those of modifications aren't working.
The reason the loan modifications aren't working, probably, is that they're not loan writeoffs, but adjustments to interest rates. What's needed here is to write off principal, because the value of the underlying asset is not coming back within any reasonable time frame.
From the press release:
It's the Realtor front group, so they have to put a positive spin on it, but their "distortion" is what I call "violent market correction". Foreclosure sales are involuntary sales. That means people who want to sell their house are looking at a market where they have to compete with prices set at sheriff sales. So they're stuck. As Duncan wrote:
This creates a pent-up, invisible supply, because those houses aren't even being listed for sale, so they're not part of the unsold inventory. The supply overhang is worse than the numbers indicate. As soon as there is any upward price movement, these "frozen homeowners" will dump their places and move to where better jobs are, further depressing prices.
"aren't working, probably, is that they're not loan writeoffs, but adjustments to interest rates. What's needed here is to write off principal, because the value of the underlying asset is not coming back within any reasonable time frame"
Yes. The time for the banks to have engaged in a realistic assessment of their loan rates was about a year ago. Now they are dragging out the liquidation of bad debts in another burst of fantasist greed. These homes will be abandoned rather than paid for at above market rates.
Housing prices won't bounce back unless the market clears and the banking industry is standing in the way, trying to have the cake they've already eaten.
Posted by: zenpundit | November 25, 2008 at 01:58 PM
Right. It's a collective-action problem, because no individual mortgage holder has an incentive to write down principal if other mortgage-holding entities don't do the same. Someone needs to step in and make sure there is no competitive disadvantage from doing what is required.
Posted by: Mithras | November 25, 2008 at 04:02 PM
Well - it's not entirely a disadvatage. The bank would have revenue flow at a lower rate vs. none at all. The reason they do not is that the bureaucratic and inflexble structure of corporate banks and their "targets" do not permit commonsense, adjustment by loan officers and managers. Purely local banks tend to have great balance sheets as the loan officers have both freedom and the knowledge of the borrower to make more realistic assessments.
Restructuring homeowner loans shopuld have been a string for receiving bailout funds from the inception. But retrofitting that requirement is better than not doing it at all.
Posted by: zenpundit | November 26, 2008 at 01:02 AM
The bank officers have different incentives from those of the shareholder. As a shareholder, I want a writedown that is smaller than the costs of foreclosure, which is about $60,000 per mortgage (from what I read). But the officer who authorizes a writedown is subject to pressure from above and to his side to make the loan "work" - that is, he's competing with his peers to minimize losses and his boss is trying to hold down avoidable losses for the same reason. These pressures are eliminated or minimized in your local bank comparison.
The problem that we've both been skipping over here is that ownership of these loans is often divvied up between different funds. There are nontrivial transaction costs involved in getting the ownership interests lined up in order to authorize a writedown.
Posted by: Mithras | November 27, 2008 at 09:45 AM