Bank Of America On Foreclosuregate: "Heightened Risk Of More Dismal Scenario"
Before we get into the latest bank assessment of fauxclosure, this
time from BofA's Michelle Meyer, we wanted to highlight one point from
today's JPM financial supplement which appears to have evaded pretty
much everyone (perhaps due to its appearance on the last page, and only
lawyers go that far). In today's earning call, Jamie Dimon stated that
the average length a mortgage is delinquent before it is finally
foreclosed upon is 14 months, or 448 days. However, it seems that average
and median in this metric are quite different. To wit, on page 21 of the supplement we read that the average delinquency at foreclosure for Florida is 678 days, while for New York, it is, get ready, 792 days! That's right, a house is delinquent on its payments, which usually means not paying anything, for over two years in New York before it is foreclosed upon. Which
also means that only now are those who stopped paying their mortgage
around the days when Lehman filed being foreclosed upon. And guess
what happened to the economy, and the stock market in the 6 months
immediately after... In other words, there is such a huge cliff of
accrued foreclosures that is supposed to be hitting right about...now,
that the double whammy of foreclosure gate and the accrued foreclosures
will blow right through the balance sheets of banks like JPM. And with
that out of the way, here is why BofA believes that there is a
"heightened risk of a more dismal scenario. If negative momentum in
the housing market kicks in, and feeds into the banking system and
broader economy, it will be hard to fight." Alas, Michelle, it already has.
From Bank of America:
The vulnerable housing market
housing market has taken another leg down as potential homebuyers
remain on the sidelines and inventory swells. This widening imbalance
should push prices lower in the near term. Clearly the market is
vulnerable, which means we should pay attention to the brewing
have been arguing for some time, the main risk to the housing market
comes from the massive foreclosure overhang. The main concern has been
that if the foreclosure process speeds up, distressed properties will
flood the market, creating an even greater disequilibrium in the market.
Unfortunately, we now have another reason to worry. Attorneys general
nationwide have launched a joint investigation into the foreclosure
process on allegations that banks used “robosigners” (sign documents
without ensuring accurate information). Banks have put foreclosure
moratoriums in place to examine their foreclosure processes.
The best case scenario
foreclosure probe should lead lenders to review policies and cure
deficiencies, which could be a clean and simple process. Under this best
case scenario, the effect on the housing market will be negligible. In
fact, it could be positive in the short-term, since moratoriums will
temporarily reduce inventory of distressed homes, thereby supporting
home prices. But this is clearly transitory.
And the worst case
foreclosure probe could open the door to more litigation. Most notably,
if a foreclosure is deemed to be under false pretences, the title could
be reinstated to the prior owner, and whoever bought the home out of
foreclosure could lose title. This could have a ripple effect on title
insurers. In addition, involving the courts could result in a wholesale
re-evaluation of the foreclosure process.
This could seriously
hurt confidence. If potential buyers of foreclosures doubt the legality
of the foreclosure process, they will be hesitant to purchase. This
means it will be even more difficult to clear distressed inventory,
further depressing sales and prices. Confidence can suffer for some time simply from fear of this worst case scenario materializing.
On red alert
our view, the most likely outcome is somewhere between these two
extreme scenarios. The foreclosure process is likely to be dragged out
further, prolonging the weakness in the housing market, consistent with a
painful U-shaped recovery. However, we admit that there is a heightened
risk of a more dismal scenario. If negative momentum in the housing
market kicks in, and feeds into the banking system and broader economy,
it will be hard to fight.