CHESSNOID

The banks have so much in losses (even though they are manipulating numbers for investor purposes) that they can’t even foreclose on properties that are in default.  In normal times, banks would file a notice of default (NOD) after 3 months of non payment.  By the 6th month, banks have taken back the property and put it in their bank repossessions (REOs) in their inventory to be resold.

Now banks want to avoid booking the losses, so they don’t complete the foreclosure process in a timely manner nor do they grant loan modifications that would greatly help those homeowners living in the property who are underwater.  There is a shadow inventory of bank REOS that keep the property values from further falling.

Banks now have decided to let everyone stay in their home for as long as possible so they don’t have to recognize these losses on the books.  Yes, they are not receiving monthly payments and they are misleading investors on true delinquency rates on portfolios, but they don’t have to finalize the true losses from the original loan amount to the true value of the house today.

Wall Street Journal:

Debra and Arthur Scriven were served notice in June 2008 that their mortgage lender, a unit of Citigroup Inc., was preparing to foreclose on their home. Fifteen months later, the Scrivens are still in their home near Columbia, S.C., and battling to stay there, even though a dispute with the lender over how much they owe prompted them to stop making regular payments last year.

Legal snarls, bureaucracy and well-meaning efforts to keep families in their homes are slowing the flow of properties headed toward foreclosure sales, even when borrowers are in deep distress. While that buys time for families to work out their problems, some analysts believe the delays are prolonging the mortgage crisis and creating a growing “shadow” inventory of pent-up supply that will eventually hit the market.

The size of this shadow inventory is a source of concern and debate among real-estate agents and analysts who worry that when the supply is unleashed, it could interrupt the budding housing recovery and ignite a new wave of stress in the housing market.

“There’s going to be a flood [of bank-owned homes] listed for sale at some point,” says John Burns, a real-estate consultant based in Irvine, Calif. When that happens, Mr. Burns believes, home prices will fall further, particularly in markets with large numbers of foreclosures. Overall, he expects home prices to decline 6% next year.

Ivy Zelman, chief executive of Zelman & Associates, a research firm based in Cleveland, believes three million to four million foreclosed homes will be put up for sale in the next few years. The question is whether the flow of these homes onto the market will resemble “a fire hose or a garden hose or a drip,” she says.

Analysts who track the shadow market have focused primarily on the gap between the number of seriously delinquent loans and the number of foreclosed homes for sale by mortgage companies. A loan is considered seriously delinquent, which typically means it is headed to foreclosure, if it is 90 days or more past due.

As of July, mortgage companies hadn’t begun the foreclosure process on 1.2 million loans that were at least 90 days past due, according to estimates prepared for The Wall Street Journal by LPS Applied Analytics, which collects and analyzes mortgage data. An additional 1.5 million seriously delinquent loans were somewhere in the foreclosure process, though the lender hadn’t yet acquired the property. The figures don’t include home-equity loans and other second mortgages

The banks aren’t doing this to be nice. That is why they don’t want to do loan modifications either because then they would have to recognize losses on the books. I think for the people living in the homes this is a blessing in disguise for them.  For the investors who have simply walked away from the empty house while banks let it sit there are deceiving their investors.

These are the same banks who were bailed out and miraculously turned it around in a quarter to be profitable. When they come back for more bailout money when their true losses are posted, I hope the Obama administration does not use taxpayer money to bail them out. Those bankrupt companies need to be allowed to go bankrupt.