Extend and Pretend about to Bite the Banksters in the Butt
I would be laughing my ass off at this if I weren’t about to put my home on the market for what the house next door sold as a foreclosure several years ago. (h/t CR)
By postponing the date at which they lock in losses, banks and other investors positioned themselves to benefit from the slow mending of the real estate market. But now industry executives are questioning whether delaying foreclosures — a strategy contrary to the industry adage that “the first loss is the best loss” — is about to backfire. With home prices expected to fall as much as 10% further, the refusal to foreclose quickly on and sell distressed homes at inventory-clearing prices may be contributing to the stall of the overall market seen in July sales data. It also may increase the likelihood of more strategic defaults.
[snip]
Some servicing executives acknowledged that stalling on foreclosures will cause worse pain in the future — and that the reckoning may be almost here.
“The industry as a whole got into a panic mode and was worried about all these loans going into foreclosure and driving prices down, so they got all these programs, started Hamp and internal mods and short sales,” said John Marecki, vice president of East Coast foreclosure operations for Prommis Solutions, an Atlanta company that provides foreclosure processing services. Until recently, he was senior vice president of default administration at Flagstar Bank in Troy, Mich. “Now they’re looking at this, how they held off and they’re getting to the point where maybe they made a mistake in that realm.”
Extend and pretend always assumed that at some point things would start turning around. But since that’s not going to happen anytime soon, this is like death by a thousand cuts.
To both the banksters and homeowners.
What no one seems to be honestly accounting for is the degree to which this process contributes to weighing the economy down.
Take a look at this graphic. It’s a version of a graphic that has gotten a lot of play over the last year showing the growth in unemployment rates over time across the country. But this one adds foreclosures and bankruptcy. While it still doesn’t show what I think needs to be shown, it does at least show how foreclosures preceded unemployment in the housing bubble states (as opposed to the Mid-West, where unemployment led to foreclosures). Some of the foreclosure-driven unemployment came through the collapse of the building industry. But as more and more people get stuck in houses, particularly as foreclosures drive down the price of real estate and therefore strand even those who have kept up with their mortgages, it leads to a whole lot less mobility which in turn leads to extended unemployment.
It sucks to sell a house for foreclosure level prices. But I’m very, very grateful we can do even that, because it means we’re able to move to a new job. But I’m acutely aware we’re paying this price because of a failed policy, one which tried to make homeowners bear all the cost for the shared mistakes of the banksters and the creditors.
So, yeah, in the not too distant future banksters are going to have to unload their shadow inventory and they’ll end up taking even bigger hits on their balance sheets than if they had not been pretending to be solvent all this time. But unfortunately, all homeowners are going to feel the pain as well.
I suspect this looming problem might finally convince the MOTUs at Treasury that they have to implement a policy that works this time–for both banksters and the homeowners.
Hah-hah-hah!
Have I ever told you that you’ve got the makings of a brilliant comic career in you? *g*
One suggestion on a minor change in that ending. Include the following at the very end: “Or not.”
No, I was serious.
They’re beginning to realize that they can’t extend long enough for the pretend part to work. So they’re going to have to find some other way to prevent all this shadow inventory from bankrupting the banks, now.
The best way to do that is the best way there was to do that back in the day: to split the losses but keep people in their houses.
I sort of wonder whether, when the MOTUs at Treasury told Rortybomb that they were going to use up all the HAMP money, whether they were about to roll out HAMP 3.0, one that actually works this time.
If so, too bad for all thsoe people who got royally fucked in the process.
I’ll buy your point that they realize they must prevent this shadow inventory from bankrupting the banks, and I’ll even grant you that your “solution” makes eminent sense, but I’m far less sanguine that they will actually make the policy decision that to save the banks they must save the homeowners.
I know we’re all accused of being too cynical here, but the truth of the matter is (or at the very least, the partial truth is) that 9 times out of 10; no, make that 99 times out of 100, the prediction that the MOTUs will make decisions that benefit the least needy (i.e. the Banksters) over that of the most needy (i.e. us) is a slam-dunk safe bet.
And it is a rare event indeed that they ever arrive at a policy decision that benefits both.
I’d venture to say that there is not a single employee of either the US Treasury or the Federal Reserve that has been made “unemployed” by the financial travails of the last 2 years.
I’d further venture that not a single employee of either the US Treasury or the Federal Reserve even fears the possibility of their own unemployment.
There is a major disconnect between how they themselves live and how the average person lives.
These are folks who live in a lifetime employment bubble regardless of the state of our economy and further, regardless of their own policy implications for our econcomy.
When all they ever smell in their personal lives is roses, it’s hard to imagine the smell of shite.
My guess is that the MOTUs at the Treasury, the Fed, the White House, and the Bankster-funded Congresscritters will eventually come up with a Fannie Mae and Freddie Mac-like solution that buys the Banksters’ foreclosed properties with taxpayer money at a profit to the Banks, and then sits on the ownership of those properties with the belief that on some future faraway imaginary date, the taxpayers will be made whole and profitable too.
Problem is that will still lead to more foreclosures and economic pain.
If you’ve got vacant foreclosures, you’re affecting the property value of everything in the neighborhood, not to mention the tax base of the local govt. So even if the foreclosure is not on the market, you’re still driving down value of all the “good” mortgages in the neighborhood.
I’ll agree with that. Taking foreclosed property off the banks’ books does not benefit local neighborhood housing prices.
Given the stalled or even perhaps retrograde employment environment, the bottomline on the housing market is further deterioration and foreclosures.
If there were a better future job market visible to all concerned, that would benefit housing prices.
A positive job market psychology was what the government MOTUs were depending upon to drag the country back from the recession.
That positive psychology was stillborn. In fact, there is ample evidence for all to see that the Repugs decided as their pre-eminent policy to deliberately, specifically, and actively work to abort the Administration’s and the Democratic Congresscritters’ efforts in this regard.
And given the current political dynamic that this has engendered as well as the small amount of time left before the 2010 elections, the Repug’s strategy to stall, impede, and filibuster has produced the exact economic malaise that they desired.
Well, to be fair, Dems willingly capitulated into bad policy decisions, as they’re now contemplating repeating by extending teh Bush tax cuts for teh wealthy.
Let me apologize to you Marcy and all of the rest of the commenters. I’ve been a Gloomy-Gus today in raining (that’s the polite version) on your parade.
I will now go stand in the corner until my normal optimistic and hopeful self returns. *g*
That’s what I think will happen, too. It was Paulson’s first plan. Those vultures never quit, they peck at us until they get what they want.
Bernanke, FED Chair, is suggesting QE that will buy bad debt from banksters and relieve their balance sheets…probably at optomistic market pricing another Bankster Bailout and main street and job creation will have to suck it up. They have taken $1.5 billion so far. The shift in loss will end up with the taxpayers under this welfare capitalism policy…because we need the banks to be profitable whether they lend to expand the economy or not.
Happy you are addressing this in the light of the drag it is putting on the our economy. Thank you!
One interesting option available to some sellers is renovating first; it enhances value, adding distinctiveness to the dwelling setting it apart from the neighborhood standards. This way a sale can happen without further devaluation. However, if the structure you are leaving is already very modern, there may be little opportunity for differentiating it from the rest of the local market. Ceding to renters could be an option, if you are prepared to address the continuum of mutual inconvenience which is the landlord*s lot in economic life. If the house is located in a 90% Democratic party registration enclave, I suspect that demographic might be a strong attractant, especially for some affluent Democratic party member prospective buyer.
Some of the foreclosures in the housing-bubble states are due to unemployment in previous recessions: people who refinanced to have money to live on while they waited for the turnaround, and ended up holding the bag when the bottom fell out, because they’d run out of unemployment and savings and home equity.
And the banks won’t do anything to help, even after selling ‘home equity loans’ as a way of getting needed money.
Fair point.
You could even go so far as to say that foreclosures are partly tied to stagnant wages nation-wide.
As someone that was in the industry for nearly three decades, (retired in early 90s) this is 1980 on steriods. What generally happens is that the lenders take these foreclosures, hold them (off the market) for many months while they further deteriorate coupled with deferred maintenance and then sell them at fire sale prices thus depressing the surrounding markets. If they would spend a few rehab dollars on them and maintain them during a reasonable marketing period (like relocation companies have traditionally done) their losses would be substantially less and the surrounding market would stablize thus benefiting them, local governments and neighborhoods. The insanity and business stupidity among lenders cannot be under estimated. They go out their way to loose money on these homes. For very little money and good marketing strategy, they could be a big part of turning the market around and stablizing prices. What they are doing now really amounts to cooking the books by not foreclosing and declaring the losses on the books. The money is gone, but they just have not acknowledged it on paper.
As I noted the other day, the other side to this spiral is the impact on municipal services and on school districts as property taxes lower due to housing values dropping and a large growing number of foreclosures.
Then bond issues are needed to keep minimum services. Further squeezing the cycle.
When the proposed solution depends on reinflating the bubble for its success, that tells you a lot about the quality of the proposal. “Pretend and extend” only works if the housing bubble can be started again.
Yeah, that’s a really good idea.
Smart banks would have spent the last 18 months looking at their delinquent loans and trying to figure out how to share the pain. A foreclosure costs the bank a lot — missed income from missed payments, lawyers and court costs to foreclose, sales costs to unload the property, and finally the loss suffered when an underwater property sells at depressed-market prices. That’s a lot of loss.
If the banks had come up with a general number on the cost of foreclosure, and negotiated with their borrowers — “we’ll cut X out of your principal, and refinance at today’s lower rates” with X as a non-trivial portion of the expected loss from a foreclosure — they would end up with a decent chance of getting the foreclosure cost minus X back. And they’d also have a much cleaner balance sheet and a much stronger loan portfolio, which would make the bank’s investors and regulators much, much happier.
But they bet big and again bet wrong that it would be better to hope that the housing bubble would reinflate.
Tim Geithner, take a bow.
(Now could we please get him off the stage for good?)
Your analysis in the rest of your comment is right on. The fundamental problem is that there is an over-supply of housing, mostly at the high end. “Starting the bubble again” won’t work in the present environment. In any commodity where there is an over-supply, what works? (a) cut prices, or (b) find more customers, or some combination of the two. Extend and pretend works against basic market principles.
There is a potential silver lining to all of this. In most urban environments, there is a crisis in “affordable housing.” The foreclosure crisis is driving the market in the direction of affordable housing, but the real estate industry and the banks are dragging their feet, kicking and screaming all the way. They still live in the dream world of Bush-era home value inflation, and they want to stay there.
Unfortunately, too many people, like our Esteemed Leader, and my wife, have gotten caught up in the home value deflation. And the banksters want to extract every ounce of blood they can before revaluing their properties. They want us to pay for their irrational exuberance.
Bob in AZ
First, the housing prices in 2008 were abnormally high. Nobody should WANT prices to ‘reinflate’ to that level. Going back housing prices were abnormally high from about 2001 on, so any kind of reinflation would probably be somewhat dubious (if intended for long-term purposes).
So, where do we stand (let’s say on a Case-Shiller scale)? Are we at 140 or 120 where 100 is pretty average since before WWII? If we could deflate to 2001 levels without too many people getting hurt we might restore things to some kind of normality. People have to be able to afford homes with the income they’ve got, not what they dream of. Incomes have not gone up the last decade, so housing price inflation above 2001 price levels isn’t helping.
Thus, we slowly deflate and people suffer a long time, so that eventually it just recedes into our memories and we return to some kind of normality.
In the short-run the banks with MBAs are suffering, though it’s compensated for to some extent by activist government help. And, people are suffering while the gov’ts attempt to grow the economy haven’t been everything we wanted. I think we have a serious long-term problem there.
Corporations sitting on trillions of cash aren’t helping either. The trade deficit isn’t helping. Republicans in Congress might go along with policies to help people produce more here, but there’s no guarantee on that. And, banks are still weak and not lending as they should. The SBA has loaned it’s heart out, but small business takes a lot to support. That cannot go on forever. And, the federal gov’t has a rather large debt.
These are anchors holding us down.
What we’ve got going for us is a good understanding of the situation and leaders who want to do something about it – if they have enough of a majority to “git ‘er done”.
You apparently missed EW’s great post last Wednesday. Take a look at the lead graph. The reasonable base level is housing prices (inflation adjusted) from about 1950-1990, when housing prices fluctuated around a stable level. If you don’t mark to market, mark to the post-War, pre-Bush levels.
Bob in AZ
The MOTU, generally, have all the “crises” we, as a society face, rigged to their advantage, be it the EWOT, or the “assault” on the rule of law. And the economic “crisis” is, of course, the main event in the eleventy-eleven-ringed circus occurring all around us.
The MOTU are convinced that they’ve enough wealth and political power to laugh in our faces, indeed the “mask” has slipped sufficiently, and they’ve not shoved it back into “place”, to show the perpetually grinning face of death, its dark, empty, lifeless “eyes” leering at humanity in general …
EW, your very cogent assessment of the inter-connected aspects of the economic “system” cannot be rationally denied, and one hopes that such “reality” may soon dawn upon and be fully grasp by certain individuals. However, as all these individuals are at a very “safe” remove from the “effects” of the reality, little grasp may be expected. It is an issue, ultimately, of “faith”, if you will, that we are dealing with, for, if “reality” is acknowledged as you postulate it to be, then “change” will be necessary, inescapable actually, at the “systemic”, or basic, fundamental level of the economy itself.
Fundamental “expectations”, now fashionable, would crumble into nothingness, and the very notion of “too big to fail, too big to nail, and too effing big to go to jail” would be seen, in this inter-connected reality, to be little more than raw, unfettered, uncontrolled, and unregulated greed. And, of course, soon thereafter, “greed” would no longer be seen to be “good”.
Now, what would that sort of thing do to the plans of the MOTU?
After all, what could “they” say, except to fall back on the old steadfast, if well-worn, gem of honest perplexity, “Who could have imagined?”
I certainly hope you are proved correct, and again, soon, EW, but if we’re left with simply gamblin’ on reason turning up, simultaneously, in all the “right” places, then I’m gonna put most of my two-cents with MadDog …
the rest will be invested in hopes that reason, understanding, and humanity may befall those, which would be all of us, who could benefit and truly profit from it.
May the future see the dawning light of reason!
DW
Glad to see you back. Hope you’re fully mended.
In another thread a fellow who calls himself tinman1967 (I’m not sure of the numbers) suggested the country needs a dose of pain to get it back on the economic straight and narrow. He is condemned as a troll. I for one would like to know how he came to believe pain is beneficial. Lots of bankers feel the same way. It is a very sick system.
A point generally overlooked is the consequences of the bailouts. If a bank gets government funds to relieve it of toxic assets (i.e. the foreclosures) do they still have a right to foreclose? The mortgage has been paid by the government. Why not let the government do the dealing?
First of all, my condolences on your situation, Marcy.
On your splitting the losses point I’m as pessimistic as some of the other commenters — the banksters are good at uniting to pay industry lobbyists, but when it comes to business amongst themselves they apparently revert to amygdala/shark/cannibal mode, as in the case of killing and eating the weakest of the herd in 2007-08. If bank A can just outlast the other banks, it will survive the current round, so only the weakest few have sufficient motivation to compromise and take a loss. Also, maybe I’ve spent way too much time in these fevered swamps, but even with a collective will to compromise it’s hard to imagine the banks being reasonable about taking losses — I imagine their negotiating position starting at 90/10 and ending at 85/15, give or take.
Finally, the broader housing game looks really bleak at this point, regardless of the banksters’ actions. They saw huge returns available through subprime etc. refinancing, but they’re money is in the greater fool game with homeowners stuck with transitions, or hollowing out their net equity, or trying to play too by flipping houses, at a time there’s been downshift in most homeowners’ abilities to repay (see: growing income and wealth inequality trendlines, jobless recovery, etc.) It looks in some ways like the banksters are as stuck as us rubes playing the Great American Housing Value/Refinancing game – it feels like musical chairs with less than half as many chairs as bottoms.
On a brighter note, it’s a lovely day here in Portland, Oregon.
NPR had an interesting piece this morning on “How Wall Street Made The Mortgage Crisis Worse.” Nice graphic metaphor involving sausage-making. Recommended, and quite relevant to this thread.
Bob in AZ
I want to share in offering heartfelt condolences to EW for her housing trauma.
I know a little bit about the inner trauma this can cause because my wife of 3 years refinanced at the height of the bubble and then, after the crash, was left holding an upside down mortgage on the home she had raised her children to adulthood in, which foreclosed, and lost all the equity she had in her Hawaii condo in Waikiki, which is in the 4th year of a 5 year fixed rate ARM that in a year will balloon into unaffordability, which she can’t refi because her credit is now bad. Catch-22 situation. We may have to sell the Waikiki condo at a net loss just to get rid of the bad mortgage on it.
Bob in AZ
The new Financial Accounting Standards did not give the banks the ability to pretend they don’t have a loss on the balance sheet forever. It just allowed them to use “significant” judgement in considering the valuation. They still have to write down the value of the assets even if they haven’t unloaded it yet. Unloading their inventory should have no effect on the asset valuation of the balance sheet. The reduction in valuation should come way before they unload the inventory. The auditors will make them justify their valuation during the audit.
Look for a lot of investor lawsuits if the realized losses far exceed the unrealized losses estimated by the banks.
And which bank do you work for?
Your references to banks using “‘significant’ judgment” is but another aspect of “pretend.” This watered-down version of the FASB proposal is nothing but Mark-to-Model 2.0. By this approach, banks have to mark to market, except when the market is pricing things at levels the banks believe are unrealistic.
From the American Bankers Association, via Calculated Risk:
Emphasis added, to illuminate the biggest loophole in the whole deal. “No, we don’t intend to sell this, so we don’t have to value it properly on our books. Oh, wait: I have just been informed that we have just put this up for sale . . .”
Of course, loopholes like this exist only when they’re valuing THEIR property. When you are applying for a loan and they value YOUR property, that’s another matter entirely.
not quite true –
holding an asset at amortized cost forever still seems to be possible if held as an “investment”
FAS 157 only applies to assets and liabilities that are carried at fair value in accordance with other applicable rules. Commercial banks and other types of financial services firms have some asset classes that are required to be carried at fair value, such as derivatives and marketable equity securities, and other types of assets, such as loan receivables and debt securities where it depends on whether the assets are held for trading (active buying and selling) or for investment. All trading assets are carried at fair value. Loans and debt securities that are held for investment or to maturity are carried at amortized cost, unless they are deemed to be impaired (in which case, a loss is recognized).
I have a hard time finding the rules that determine if a mortgage is “impaired” in a way that forced that conclusion.
Thanks to those offering condolences. But really, the people who need them are those who are stuck, w/o savings and w/o a way to walk away. Because those people are basically serfs to the banks at this point.
That map matches up pretty closely with the last election map – in reverse. Who’s Obama working for?
While only a wild guess, extend and pretend will only last until the November elections results have come in and then the bottom truly falls out from under the markets as we head into a second great depression.
One has to seriously question their sanity when a stock market can rise 151 points from the dead after a stunning week of terrible financial news, a Fed head who more or less stands ready to do God knows what to keep the banking system going and the most laughable GDP revision the powers to be have ever come up with. Everything and I mean all numbers that were produced this week were horrible, and yet the DOW could close up an amazing 151 points?!?! Pass the Kool Aid please. Sadly, extend and pretend can be said of every aspect of our financial and political system and the joke is on us. After all, we the people are the lender of last resort and we keep electing the same morons into office. Go figure.
What I love about America is the freedom of choice. And yes sometimes those choices are forced upon us, when we do not want to make them. When are we going to stop blaming someone else for our own problems? I bought a Condo 6 years ago. I tried selling it for 3 years, with only one reasonable offer, which I stupidly did not take. My dumb choice. Now I will take a bath if I sell or I can ride out the storm. If the banks want to extend and pretend… then let them. Its their choice.
If it were just about “extending” then they would not have told home owners who were current that they needed to be delinquent before qualifying for HAMPS. I think it was as much about padding the loans with fees as it was about “extending”. Once people let themselves get delinquent it triggered the massive fees, and THEN they would be turned down by HAMP as well. So it extended but shortened the life of the extension by adding the fees. I think it’s about the fees.
here’s the irony after all;
it’s because of their own pressure to keep each other from lending, it’s because of the ridiculous fiscal policies of the obama administration giving money to banks instead of the middle class
it’s because of that irony their strategy of kicking the ball down the road did not work
had they used tarp for the loans they were intended, had the obama administration put out some help wanted signs with real jobs programs, the housing market would be healthy
that would assume facts not in evidence, the industry is not concerned about their future, the facts in evidence demonstrates they are interested in today not tomorrow
We just got a call from one of our business lenders. Unbeknownest to us, we were given a 90 hiatus on paying our loan. We couldn’t pay, which is why we didn’t notice. When this stuff first happened my husband offered to make small payments until things turned out (they haven’t yet). The lender didn’t want this. Now, they are asking if we can make even a $100 a month payment, until things turns around and they stopped the accural of interest. At least it is realistic.
One of the themes going around a few years ago – part of the ‘zombie bank’ meme – was that the banks weren’t lending because they weren’t sure of where the losses where — that they had to keep capital on hand to cover unexpected liabilities. As I recall, part of the rational for TARP was removing that threat to free banks to lend. Who would have thought that, at the same time it was buying all those toxic securities, Treasury was working at cross-purposes by effectively encouraging banks to keep their mortgage holders in a hole?
Finally allowing Chapter 13 cramdown would be the best solution.
‘Extend and Pretend’. Sort of reminds of the ‘light at the end of the tunnel.’ we know how that one turned out. Where’s Ben with his Helicopter?
Interesting piece on NPR’s Talk of the Nation this week. Apparently some states are working with Nevada Banks, and renting very upscale housing that is in foreclosure to persons with Section 8 certificates (Rental Assistance), at something of a premium for renters. They are making McMansions in the Las Vegas area available at 400 from the renter, Section 8 payments of 1600 per month, on the assumption that the renters will continue to qualify for the subsidy, (apparently most are on Social Security Disability), and out of their disability or other entitlement payments will be good for the 400 per month. (nothing said about insurance or utilities or the need for a working car in the Las Vegas Burbs.) Apparently HUD initiated the program — afterall, they issue the Section 8 certificates, and pay their part of the rents. They have all too many applicants in places where little section 8 housing exists, so they are taking blocks of McMansion Foreclosures and new inventory off someone’s hands in Las Vegas, doing a whoppie, and calling it section 8 housing. If the economy ever comes back, the banks can take the houses out of Section 8 with proper notice, and sell them. If not, they probably more or less break even on their investment, and have tenents. (I very much approve of this creative move — but can hear the Tea Baggers protests all ready — Welfare Mom with six kids gets McMansion with granite countertops, hardwood floors, and great room.) The typical Section 8 successful applicant ought to be able to wring 400 per month rent out of the Vegas Service Economy without too much effort.
Another NPR story — all about the Federal Reserve buying up billions in Mortgages in or near foreclosure. No information as to where or what economic level of housing — but it set me to wondering if they won’t turn around and make a deal with HUD to do something similar to what the first little story suggested. I like occupied housing better than empty houses, and HUD can (and has been) be turned into a housing maintence agency — they have lots of experience managing property, fixing broken toilets, bad drains and the like, and have experience dealing with limited income folk.
Now that story was back to back with a local piece about a couple who owned a house they could not sell, but had gotten a divorce, but still were living in their house which was way under water, and everything on their street (In Burnsville, MN) was either foreclosed, or for sale. The couple were still “friendly” but both wanted to get on with life post divorce. Somehow reminds me of an old Soviet Union story about a couple who had divorced years earlier, but were stuck with a one bedroom apartment and could not get the bureaucracy to “divorce them.”
My own prediction — I don’t think the old market as we understood it will come back at all. Not only does this huge inventory of suburban, single family fairly large houses exist, we are about to begin to retire the baby boomers, many of whom will want to downsize, spend less time growing grass, and in a few years, want to be close to public transport and other services. In town condo’s on bus and light rail lines should do well, but 4 bedrooms with basement large lawn and great room, not so well. The Baby Boom Retirement spree will last twenty plus years — and the post baby boom birthrate will not replace them. In otherwords, our housing inventory is all wrong. It is a perfect case study of how the pure market notion alone, without any demographic based planning, is false theology.
Sara-
See my comment @13, which I think is exploring a similar line of thought.
Thanks for your more thorough and evidence-based comment!
Bob in AZ