The Logical Flaw


Looks like the Admin, Congress and the FASB have cross purposes. Now the banks have a real problem.  Banks can't execute mortgage mods without adjusting the values (read losses) on their balance sheets.


Why, after arguing for banks to have more leeway, is Congress now pushing back? Because many government responses to the financial crisis are more about manipulating prices -- and behavior -- than truly getting markets back on their feet.

Dressing up bank balance sheets was a first-quarter political priority. Now there is a push to get banks to modify more troubled mortgages. That effort is being stymied by a rosy view taken by many banks of the value of home-equity loans and second-lien mortgages.

Many banks have marked down these loans only by 3 percent to 4 percent, said Paul Miller, bank analyst at Friedman Billings Ramsey & Co. These loans in many cases would likely fetch about 40 cents on the dollar if sold in today’s market.



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There are factors as to why modifications

will not happen (in my opinion):

1) Many of the largest mortgage servicers (Chase, BofA, Citi, Wells Fargo) are also the second mortgage holders. There is a conflict of interest. The second mortgages are practically worthless (40 cents on the dollar is very generous) and any loan mod decreases the value even more.

2) Banks are holding out for increase in housing prices. Good luck with this one. If they are this will be worse than a "lost decade".

3) This from Naked Capitalism: Wells Sells $600 million in distressed assets at 35 cents on dollar. Again, banks may be holding out for private deals like this one.

did you see the renting after foreclosure proposal?

They lose the equity in the house but can stay and pay rent. Doesn't quite make sense because if one can afford the rent they should be able to make the house payment.

Banks as landlords

Yes, I saw that.
Most states have very specific laws about rental contracts.
I doubt loan officers want to be unclogging toilets.

I have read articles about banks doing everything under the sun to avoid loss writedowns: not filing foreclosures, foreclosing without transferring deeds, etc.

As much as they want to rub on the genie lamp, prices are not going to rebound in the near future and the losses are unavoidable.

It's inevitable - M2M has to be restored.