If we start to analyze the 1.5 trillion in debt that is at risk next year, the fallout raises some interesting questions. Making conservative assumptions about the number of loans that will go into foreclosure still leads to banks holding a lot of bad paper.
Say for arguments sake that only 25% of these highly leveraged loans get foreclosed on. And that the banks can recover 50% of their losses by reselling the foreclosure on what will be a very glutted real estate market. (Think sales costs, market loses, foreclosure exenses, and eviction costs) This leaves the banks holding .25*.5*1.5 trillion = 187.5 billion in loan losses. You can play with the numbers and say only 10% get foreclosed on, that is still 75 billion in losses. And this is the first of the bubble bursting years, with bigger losses the next year.
You can argue that 10% with a 50% recovery is too negative, but with a glut of inventory already, banks looking for a quick sale are going to take big losses. If 7.5 million people are in the 1.5 trillion dollar basket, and only 10% are unable to stand a 50% increase in loan payments, then 750,000 houses hit the market – either because the owners try to sell in advance of a foreclosure, or the bank forecloses. Cut that number in half, and it is still 375,000 new homes on the market.
If any of this comes to pass, the banking system and real estate markets will have a hard time absorbing the losses.
