You paint a scenario of banks (or investors for whom the banks are administering mortgages) beginning to lower REO prices only when the market punishes them by lowering their own stock/loan values. I agree. Is there anything that could prevent that from just playing out over time as most of us here expect (or hope)?
This last week we saw a concerted private bank effort to avoid a melt-down in sub-prime loan values. For a modest infusion of bank capital, a melt-down was averted. If this continues for a long time, banks and others will eventually run out of capital they want to put at risk.
But the federal government has pockets deep enough at that point to put up a very powerful resistance to significant further drops in home prices, and even increase them. Imagine a new program from FNMA that insures loans up to $850,000 with 1% down and no principal payable for the first 10 years, based on the buyer solemnly swearing that he or she has the income to make the payments. How many congressmen would vote against that if home prices were down 20% across a large part of the country? How many lobbying dollars would swing behind that? How would that make the CEO of FNMA look in front of the court of public opinion and congress?
I think we have to be realistic here and realize that, barring an additional powerful downward kick from some unanticipated force, like a global recession, the only circumstance under which house prices in Southern California will drop severely is if the severe drops are restricted to a small fraction of the whole country. Any scenario that would cause a severe drop in home prices for a large number of voters nationwide will be met with very powerful countermeasures.
I realize the federal government is not all-powerful, and anything it does will have downsides that will be considered before decisions are made, but 50 million voters ‘losing’ $100,000 or more each and pounding angrily on the doors of the committees in congress will tilt the debate pretty sharply.
Anyone see a reason this couldn’t or wouldn’t happen? (I already buy into the “shouldn’t”, so this is not a question of what’s right or wrong politically, only what’s most likely.)
