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Tuesday, June 21, 2011

Banks Insolvent; Foreclosures The Problem, Not The Solution

Daniel Alpert, Managing Partner, Westwood Capital: In our view, the magnitude of pending foreclosures, together with housing prices that continued to decline through March, could potentially result in losses to banks that materially exceed existing provisions for such losses. Moreover, if the backlog of foreclosures were to move through repossession and liquidation, the impact on the housing market would unquestionably be to accelerate the pace of falling prices (at least in many regions of the country).

Not surprisingly, in this environment, lender recoveries of loan principal through the liquidation of foreclosed mortgage collateral has been dismal – averaging between 35% and 40% of loan face amount (taking into consideration both selling price and all costs related to the foreclosure and liquidation) for years now and showing no signs of improving.

With home prices, per the S&P Case Shiller 20-City Index, having fallen 6.2% from the end of Q3 2010 through the end of Q1 2011, and now more than 33% below peak levels in July of 2006, the largest banks in the U.S. are therefore loath to repossess and liquidate defaulted home loan collateral.
--- More good info at link (Ritholtz)

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