On September 2nd the current foreclosure moratorium was to be lifted, according to my friend at the Bank of America. Interestingly enough, the BofA was already exempt from the moratorium, and despite that, they’ve been loathed to add to their REO inventory, much less sell any of it.
In the circles I swim in, the conventional wisdom is that the shadow inventory (houses that are now REO but not yet for sale on the MLS) has to be released to the market at some point, and, when that happens, prices are going to continue to decline at least another 10%. A basic understanding of economics would suggest that 10% is not unreasonable, give the sheer (rumored) amount of the shadow inventory.
I have to admit though, that I’m now starting to think “at some point” will never happen, and that the banks are going to continue to parcel out the REO inventory in dribs and drabs for years to come.
Why?
There are a number of reasons that I’m starting to change my view on this.
Leading the charge is the fact that bank CEOs like to keep their banks in business, and to do that, they need to have money to lend. If they start selling REOs in volume, prices must decline and the net result of that will be that the bank’s assets will take a huge hit. As banks capital requirements are set by the regulators, a drop in assets will mean that more reserve capital must be set aside and that will, in turn, reduce the amount of capital available for lending.
With nothing to lend, a bank is essentially out of business, and a CEO is out of a job.
Next on my list is the fact that it is probably cheaper to let a family stay in a house they aren’t making payments on, than it is to hire lawyers, go through the foreclosure process, and then be saddled with all the costs associated with insuring and maintaining an empty house. Essentially, the delinquent homeowner is a caretaker that doesn’t charge the bank anything to look after the house.
In other words, why foreclose on a ton of houses all at once, and then be saddled with massive costs, when you can just let John and Mary live there (even if they aren’t making payments), until such time as you are ready to foreclose and sell in an orderly fashion?
Given the number of REOs on the banks books now, plus the number of borrowers that go into default on a daily basis, it could take years and years to slowly bleed off all that inventory.
The net result of a controlled redistribution of these assets is that they don’t get sold at fire sale prices and the underlying market for 1st time buyers remains very healthy – even if it is artificially so. Stability, be it contrived or real, has the same net effect, increased consumer confidence – a much needed ingredient if there is to be an end to the recession.
Your comments are always welcome,
TRD
