After the attempts by the FOMC yesterday to assure people the economy has been ‘leveling’ off, it left a hollow ring in our ears, as news that homes about to go into foreclosure rose by seven percent from just June to July dampened any positive spin attempted by Ben Bernanke and the agency.
According to RealtyTrac, filings for foreclosure are up an extraordinary 32 percent from the same time period last year, while over 360,000 home owners have received a notice related to being foreclosed upon.
In July alone banks have taken back 87,000 homes, an 8,000 increase over June’s foreclosures.
The problem the banking industry faces is with Alt-A mortgages, which start to come due next year through 2011. Estimates are up to half of all Americans with mortgages will be underwater in 2011.
The practicals of this borrowers will be faced with re-sets next year, while having their homes worth at least 20 percent less than when they bought them; in some major re-set states such as Florida, California, Arizona and Nevada, the value of homes are down by 40 percent and higher.
The quandary faced by the banks is they hate to have to register the losses connected to defaulted loans, as it makes their books look bad, at the same time they can’t and won’t simply roll over the existing loans at face value either.
Re-sets are required by law, and so it must be done, and so there will be mass evictions over the next couple of years, because people will either have to leave their homes or make up the difference between the resale value of their home and the face value of the loan. Very few will be able to do this; especially in economic times like we’re in. And this doesn’t even get into the commercial real estate side of things, where vacancy rates are also down.
So where does all of this leave the banking industry? At this time there are over 300 banks listed officially on the problem list of the FDIC. I’m positive that this is probably far lower than the reality, which will be exposed over the next year when re-sets come due.
What this means is the banking industry is more than likely even in more trouble than we see at this time, and bank solvency is in more doubt than it seems.
Who will lend to banks subject to re-sets over the next year? No one will. The other problem the smaller banks don’t get the benefits of some of the larger banks which are allowed to exchange loans at face value for T-bills. So that leaves them completely vulnerable and with no recourse.
The only scenario that could change this is if property prices were to rebound and the re-sets then being covered by a rollover. That’s a highly unlikely scenario.
So if you hear we’re in some type of housing recovery, you must ask yourself a couple of questions:
Are lenders going to allow a roll over of a loan that’s less than twenty to forty percent than its face value?
How can a defunct loan not be counted as a defunct loan if it’s not re-set? In other words, how can it legally be carried on the books as a good loan at face value?
If these questions can’t be satisfactorily answered (and they can’t), then we are far away from not only a housing recovery, but the banking industry is also far away from a recovery, and the fallout is still not close to being resolved.
We’re still in for a long ride no matter how the government and its many media outlets attempt to spin it.
