But overall, you’re right. It isn’t complicated. Yet they still don’t do it. Why is that? There is not now, nor has there ever been any motivation for letting any individual asset rot in delinquent status. There are those that have argued that the delays as a whole have been part of some sort of grand scheme to manipulate the market to maintain stability, and create a market where foreclosures would be systematically released into the market. The hidden inventory that so many expected to eventually hit the market. I don’t buy it. That inventory has never showed up. I think they (the lenders and loan servicers) really are that bad at managing distressed assets.[/quote]
By stalling the foreclosure process, the lenders were able to sell off or refi out of many of these bad mortgage assets. For those loans that were not GSE loans, the Federal Reserve’s ZIRP policy, along with various modification/refi programs, enabled lenders with high-risk mortgages (and related securities and derivatives) on their books to get out of these positions when borrowers refinance into govt-backed mortgages.
With the Homebuyers’ Tax Credit, reduced inventory (resulting from the delayed foreclosures), and low interest rates, the value of the lenders’ collateral was kept at artificially high values which make the bailouts look less egregious to taxpayers and other market watchers.
The lenders were stalling the foreclosure process because they were buying time in the hopes that one of the many foreclosure prevention programs and asset-price inflation schemes would work. At this point, it looks like it’s worked for many lenders who would have been taking huge losses by now if not for all of the manipulations.
