Blogs For Victory

A second wave of foreclosures is building:

It is conventional wisdom in the housing blog community (and the OC Register) that a giant wave of foreclosures is coming later this year, but what facts do we have that support this thesis? Today, we take a look at the available data and show this wave in its formative stage.

Foreclosure is a four step process: (1) the borrower quits making payments, (2) the lender issues of Notice of Default, (3) the lender issues a notice of Trustee Sale, and (4) the foreclosure auction occurs on the courthouse steps. Steps 1, 2 and 3 are separated by 90 days each. At any time during this period, either the borrower can get current with their payments, or the borrower and lender can agree to a loan modification. If either contingency occurs, the foreclosure process is aborted.

California passed SB1137 to force lenders to try harder to reach borrowers in default and work out a loan modification plan. Also, the GSEs and many large banks were on voluntary or mandated foreclosure moratoria. This caused a dramatic decline in Notices of Default (step 2). Unfortunately, as I noted Moritorium on Defaults Announced, stopping lenders from issuing notices does nothing to prevent borrowers from actually defaulting (step 1). Borrowers everywhere stopped making payments, and lenders merely stopped issuing notices about it.

The hope of foreclosure moratoria is that additional time will allow lenders to work out the bad loans and avoid the foreclosure process. Unfortunately, it did not work. First, very few borrowers even try to work out the loan with the lenders, and many who try fail to reach an agreement. Second, most who have agreed to a loan modification end up defaulting again; the redefault rate is running at about 50%. And third, financially it is in a borrower’s best interest to give up the house in foreclosure, so the only thing keeping them in the loan and in the home is their sense of morality concerning the payment and their attachment to their properties.

It will come – in Las Vegas, for instance, you can pick up houses which were $400,000 four years ago for $125,000 today. Anyone in a 400k mortgage feels a strong pull to work out a purchase of an equivalent home for a fraction of the price and then just bag it on the more expensive house. Lenders should realize this and thus work out ways to convince people to stay in their homes – they should, in the end, figure out ways and means to set the current mortgage amount in line with current market values with inputs for what the lender paid at the start and what the borrower has paid since the inception of the loan.

In effect, what we need is a bankruptcy re-organization of America’s housing market – its a big, old poop sandwich and everyone has to take a bite. But the banks are cowardly and short-sighted, the government is bent on saving the banks from their folly and the people are going to make rational economic decisions. Ergo, another wave of foreclosures is coming no matter how many moratoriums they have or fiscal hocus-pocus is produced to make it as if economics doesn’t matter – there’s just no economic sense in paying more for housing than you have to.

This second wave of foreclosures will eat into the (mostly mythical) profits banks have been showing of late, which will cause credit to freeze up, with will cause markets to collapse, which will cause a full blown economic depression…and all The One’s spending won’t put Humpty Dumpty back together again. All that money we’ve blown through might as well have been torched in a bonfire – spending doesn’t create wealth; making, mining and growing things does…and if you invest in such things, you’ll make money. Real money – not the bogus wealth of fiat money sifted through a usurious financial system which produces nothing but Chinese slave-goods and fat bonuses for corporate executives who did nothing at all. Liberal financial sharks have done well out of this, just as they have out of every economic debacle since the world started to go off hard money…but Soros having more money won’t make an unemployed truck driver feel very good.

Dumb and dumber, that’s all we’ve been – and we’re going to pay the price. Eventually we’ll work our way out of it, but there’s going to be a price to be paid.