As Obama and Congress fiddle, America liquidates housing sector
By Christopher Whalen
The real story is out in the housing market, where more than half of all home sales this year will be involuntary foreclosure liquidations. The slow erosion of home prices is likewise eating away at the willingness of lenders to take risk in real estate, thus the 4% decline in loan balances YOY according to the FDIC.
I estimate that Fannie and Freddie alone are hiding $200 billion worth of bad loans on their books simply because there is no market for these foreclosed homes. Ditto for the largest servicer banks such as Wells Fargo, Bank of America, JPMorgan Chase and Citigroup. To clean up this mess with finality is going to cost $1 trillion or so in round numbers. But nobody in Washington wants to go there.
As we wrote in The IRA this week: “It is no accident that states such as Illinois, Nevada, Missouri, and Maryland are all considering legislation to ban appraisers from using involuntary foreclosure sales in home valuations. In a rational world where programs such as HAMP were really effective to restructure underwater loans and, of necessity, say 50% of all HELOCs were written down to zero, both the Too Big To Fail banks and the private mortgage insurers would be insolvent.”
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Chris knows it, you know it, likely millions are aware. But the rules are in place for a 10-year trek back to solvency. That's how long it took during the 80s when all the big moneycenter banks were insolvent from Latin American exposure. The situation is much worse now because of leverage. But back in the 80s we didn't have Paul Volcker buying the banks' toxic assets. And we didn't have a cool trillion of worthless second-liens clogging balance sheets. For the favorable HELOC accounting treatment alone, Bernanke is truly a banker's best friend.
Related from Whalen:
Expect An ONSLAUGHT Of State Mandated Foreclosure Moratoriums In 2011
Devaluation And Default Will Be Dominant Banking Themes Of 2011
Banks, Illusory Expectations and The Great Federal Reserve Shell Game
Everything You Need To Know About Foreclosures, Loan Put Backs & Bank Risk