Shadow Inventory – The Flood that May Never Come

[davelj]

Clearly lots of confusion here. There are shenanigans that banks can play with loan valuations, but… not to the degree, or in the manner that you’re suggesting with respect to SFRs.

When a loan goes on non-accrual (that is, the loan is 180 days past due) the bank has to set aside reserves (through a “provision”) to cover for any estimated loss (admittedly, this number is generally too low if the loan then goes to REO post-foreclosure). Once the bank forecloses, it has to mark the property to market (and provision the difference between the loan value and the expected recovery) and the loan becomes Real Estate Owned (REO). Now, if there is an additional loss beyond what was expected (likely these days), then there is an additional charge off. But, it’s not as though a bank keeps an SFR loan on the books at $200K until the property is sold post-foreclosure and then wakes up and says, “Oops! Gotta charge off $100K!” The vast majority of that charge off has already occurred by the time the property is sold out of foreclosure. And, more importantly, most SFR loans aren’t held by directly by banks. They’re in securitizations held indirectly by banks and the servicers are making the foreclosure decisions, not the lender itself.

So, yeah, plenty of shenanigans can be played at banks. But the main reason that foreclosures gum up the system is that servicers are understaffed relative to the work to be performed. And the various anti-foreclosure laws are also monkeying with the process.

[sdduuuude]

Good details, davej. Thanks for the insight. That’s why I posted it as a theory for discussion and not fact.

Does this mean the banks have more incentive to do loan mods – to keep houses out of foreclosure and keep that market value away?

Also – do the securities themselves track this mark-to-market charge-off ?

[sdduuuude]

Good details, davej. Thanks for the insight. That’s why I posted it as a theory for discussion and not fact.

Does this mean the banks have more incentive to do loan mods – to keep houses out of foreclosure and keep that market value away?

Also – do the securities themselves track this mark-to-market charge-off ?

[sdduuuude]

Good details, davej. Thanks for the insight. That’s why I posted it as a theory for discussion and not fact.

Does this mean the banks have more incentive to do loan mods – to keep houses out of foreclosure and keep that market value away?

Also – do the securities themselves track this mark-to-market charge-off ?

[sdduuuude]

Good details, davej. Thanks for the insight. That’s why I posted it as a theory for discussion and not fact.

Does this mean the banks have more incentive to do loan mods – to keep houses out of foreclosure and keep that market value away?

Also – do the securities themselves track this mark-to-market charge-off ?

[sdduuuude]

Good details, davej. Thanks for the insight. That’s why I posted it as a theory for discussion and not fact.

Does this mean the banks have more incentive to do loan mods – to keep houses out of foreclosure and keep that market value away?

Also – do the securities themselves track this mark-to-market charge-off ?

[davelj]

[quote=sdduuuude]Good details, davej. Thanks for the insight. That’s why I posted it as a theory for discussion and not fact.

Does this mean the banks have more incentive to do loan mods – to keep houses out of foreclosure and keep that market value away?

Also – do the securities themselves track this mark-to-market charge-off ?

[/quote]

The securities’ actual cash-flow performance tracks the charge-offs (with a slight lag), but the PRICES of the securities in the market reflect the market’s collective opinion regarding (1) future cash flows, and (2) opinions on the securities’ future prices. To summarize number (2) and to paraphrase Keynes: Most near-term price movements in asset markets are the result of guessers guessing what the other guessers will guess about price action in the future. That is, there’s lots of speculation, but that speculation is generally anchored around something fundamental going on.

The bank’s incentive is pretty simple: maximize the value of the loan. These days, that probably means a combination of lowering principal (just take a charge-off already!) and lowering the rate as well.

I’ll use the example of a $200K loan on a $220K property (at origination). Let’s say that the value is now $132K (down 40%) and the borrower has fallen behind. It’s probably best for the lender (I don’t care whether it’s the “bank” or some other holder of a security) – to reduce the principal to, say, $165K – that is, meet them half way – and lower the rate a bit so that these folks stay in the home. I think MOST folks would view that as a good deal. And clearly it’s a good deal for the bank because foreclosure is going to cost them considerably more between getting a lower price and all the costs involved.

Now, a bank can do that easily. But within a securitization it gets tricky because the servicer has to show discretion on the part of the securities’ owners. That’s where things get messy. The servicers want cover from lawsuits before they’re going to just start reducing principal balances en masse. And then there are the seconds. Anyhow, my point is that, unfortunately, a lot of the problem with both doing loan mods and getting foreclosures processed and sold is due to the structure of the industry – specifically, the securitizations. It’s just a major pain in the ass to modify loans and foreclose on properties that are held in securitization trusts.

[davelj]

[quote=sdduuuude]Good details, davej. Thanks for the insight. That’s why I posted it as a theory for discussion and not fact.

Does this mean the banks have more incentive to do loan mods – to keep houses out of foreclosure and keep that market value away?

Also – do the securities themselves track this mark-to-market charge-off ?

[/quote]

The securities’ actual cash-flow performance tracks the charge-offs (with a slight lag), but the PRICES of the securities in the market reflect the market’s collective opinion regarding (1) future cash flows, and (2) opinions on the securities’ future prices. To summarize number (2) and to paraphrase Keynes: Most near-term price movements in asset markets are the result of guessers guessing what the other guessers will guess about price action in the future. That is, there’s lots of speculation, but that speculation is generally anchored around something fundamental going on.

The bank’s incentive is pretty simple: maximize the value of the loan. These days, that probably means a combination of lowering principal (just take a charge-off already!) and lowering the rate as well.

I’ll use the example of a $200K loan on a $220K property (at origination). Let’s say that the value is now $132K (down 40%) and the borrower has fallen behind. It’s probably best for the lender (I don’t care whether it’s the “bank” or some other holder of a security) – to reduce the principal to, say, $165K – that is, meet them half way – and lower the rate a bit so that these folks stay in the home. I think MOST folks would view that as a good deal. And clearly it’s a good deal for the bank because foreclosure is going to cost them considerably more between getting a lower price and all the costs involved.

Now, a bank can do that easily. But within a securitization it gets tricky because the servicer has to show discretion on the part of the securities’ owners. That’s where things get messy. The servicers want cover from lawsuits before they’re going to just start reducing principal balances en masse. And then there are the seconds. Anyhow, my point is that, unfortunately, a lot of the problem with both doing loan mods and getting foreclosures processed and sold is due to the structure of the industry – specifically, the securitizations. It’s just a major pain in the ass to modify loans and foreclose on properties that are held in securitization trusts.

[davelj]

[quote=sdduuuude]Good details, davej. Thanks for the insight. That’s why I posted it as a theory for discussion and not fact.

Does this mean the banks have more incentive to do loan mods – to keep houses out of foreclosure and keep that market value away?

Also – do the securities themselves track this mark-to-market charge-off ?

[/quote]

The securities’ actual cash-flow performance tracks the charge-offs (with a slight lag), but the PRICES of the securities in the market reflect the market’s collective opinion regarding (1) future cash flows, and (2) opinions on the securities’ future prices. To summarize number (2) and to paraphrase Keynes: Most near-term price movements in asset markets are the result of guessers guessing what the other guessers will guess about price action in the future. That is, there’s lots of speculation, but that speculation is generally anchored around something fundamental going on.

The bank’s incentive is pretty simple: maximize the value of the loan. These days, that probably means a combination of lowering principal (just take a charge-off already!) and lowering the rate as well.

I’ll use the example of a $200K loan on a $220K property (at origination). Let’s say that the value is now $132K (down 40%) and the borrower has fallen behind. It’s probably best for the lender (I don’t care whether it’s the “bank” or some other holder of a security) – to reduce the principal to, say, $165K – that is, meet them half way – and lower the rate a bit so that these folks stay in the home. I think MOST folks would view that as a good deal. And clearly it’s a good deal for the bank because foreclosure is going to cost them considerably more between getting a lower price and all the costs involved.

Now, a bank can do that easily. But within a securitization it gets tricky because the servicer has to show discretion on the part of the securities’ owners. That’s where things get messy. The servicers want cover from lawsuits before they’re going to just start reducing principal balances en masse. And then there are the seconds. Anyhow, my point is that, unfortunately, a lot of the problem with both doing loan mods and getting foreclosures processed and sold is due to the structure of the industry – specifically, the securitizations. It’s just a major pain in the ass to modify loans and foreclose on properties that are held in securitization trusts.

[davelj]

[quote=sdduuuude]Good details, davej. Thanks for the insight. That’s why I posted it as a theory for discussion and not fact.

Does this mean the banks have more incentive to do loan mods – to keep houses out of foreclosure and keep that market value away?

Also – do the securities themselves track this mark-to-market charge-off ?

[/quote]

The securities’ actual cash-flow performance tracks the charge-offs (with a slight lag), but the PRICES of the securities in the market reflect the market’s collective opinion regarding (1) future cash flows, and (2) opinions on the securities’ future prices. To summarize number (2) and to paraphrase Keynes: Most near-term price movements in asset markets are the result of guessers guessing what the other guessers will guess about price action in the future. That is, there’s lots of speculation, but that speculation is generally anchored around something fundamental going on.

The bank’s incentive is pretty simple: maximize the value of the loan. These days, that probably means a combination of lowering principal (just take a charge-off already!) and lowering the rate as well.

I’ll use the example of a $200K loan on a $220K property (at origination). Let’s say that the value is now $132K (down 40%) and the borrower has fallen behind. It’s probably best for the lender (I don’t care whether it’s the “bank” or some other holder of a security) – to reduce the principal to, say, $165K – that is, meet them half way – and lower the rate a bit so that these folks stay in the home. I think MOST folks would view that as a good deal. And clearly it’s a good deal for the bank because foreclosure is going to cost them considerably more between getting a lower price and all the costs involved.

Now, a bank can do that easily. But within a securitization it gets tricky because the servicer has to show discretion on the part of the securities’ owners. That’s where things get messy. The servicers want cover from lawsuits before they’re going to just start reducing principal balances en masse. And then there are the seconds. Anyhow, my point is that, unfortunately, a lot of the problem with both doing loan mods and getting foreclosures processed and sold is due to the structure of the industry – specifically, the securitizations. It’s just a major pain in the ass to modify loans and foreclose on properties that are held in securitization trusts.

[davelj]

[quote=sdduuuude]Good details, davej. Thanks for the insight. That’s why I posted it as a theory for discussion and not fact.

Does this mean the banks have more incentive to do loan mods – to keep houses out of foreclosure and keep that market value away?

Also – do the securities themselves track this mark-to-market charge-off ?

[/quote]

The securities’ actual cash-flow performance tracks the charge-offs (with a slight lag), but the PRICES of the securities in the market reflect the market’s collective opinion regarding (1) future cash flows, and (2) opinions on the securities’ future prices. To summarize number (2) and to paraphrase Keynes: Most near-term price movements in asset markets are the result of guessers guessing what the other guessers will guess about price action in the future. That is, there’s lots of speculation, but that speculation is generally anchored around something fundamental going on.

The bank’s incentive is pretty simple: maximize the value of the loan. These days, that probably means a combination of lowering principal (just take a charge-off already!) and lowering the rate as well.

I’ll use the example of a $200K loan on a $220K property (at origination). Let’s say that the value is now $132K (down 40%) and the borrower has fallen behind. It’s probably best for the lender (I don’t care whether it’s the “bank” or some other holder of a security) – to reduce the principal to, say, $165K – that is, meet them half way – and lower the rate a bit so that these folks stay in the home. I think MOST folks would view that as a good deal. And clearly it’s a good deal for the bank because foreclosure is going to cost them considerably more between getting a lower price and all the costs involved.

Now, a bank can do that easily. But within a securitization it gets tricky because the servicer has to show discretion on the part of the securities’ owners. That’s where things get messy. The servicers want cover from lawsuits before they’re going to just start reducing principal balances en masse. And then there are the seconds. Anyhow, my point is that, unfortunately, a lot of the problem with both doing loan mods and getting foreclosures processed and sold is due to the structure of the industry – specifically, the securitizations. It’s just a major pain in the ass to modify loans and foreclose on properties that are held in securitization trusts.

[sdduuuude]

Excellent. Thanks !

[sdduuuude]

Excellent. Thanks !

[sdduuuude]

Excellent. Thanks !

[sdduuuude]

Excellent. Thanks !

[Author]

Posts