Yes, but how fast will prices drop?

[North County Jim]

Bank defaults and foreclosures will lead to less money available for mortgages, so only the most creditworthy will qualify. This will reduce the number of possible buyers.

That certainly sounds like a reduction in credit demand to me. Very deflationary.

[powayseller]

It does sound deflationary, doesn’t it. Do you read itulip? Erin Janszen has a KaPoom Theory, where he predicts deflation.

I know nothing about buying foreclosures, NOD laws, or bank REOs. I don’t know how homeowners and banks will interact in this area. Perhaps someone else can help us out here.

[North County Jim]

You’ve been banging the inflation drum very hard. Are you reconsidering?

[Bugs]

As far as the foreclosure situation works out I wonder too. This time might really be different because of the numbers. The nation is stll paying for the S&L Bailout of the 80s, and the current number of at-risk residential loans and the extent of price distortion dwarfs that spike. Losing $25,000 in principal on a $150k mortgage loan was bad news back then. I can only imagine what’s going to happen when we’re talking about $150k losses on $600k mortgages. (Which, BTW, only represents a 25% decline).

At the current interest rates and origination fees the lenders are charging, how many $150k losses can they suffer without going down?

[powayseller]

North County Jim – Could you give more info about deflation? Maybe we need a thread on that topic. Dr. Faber says we can have inflation and deflation. I don’t know what we have for sure: I see prices rising all around me: inflation. Then you make a good point about credit contracting: deflation. I know Bernanke is worried about deflation, and Mish at globaleconomicanalysis.com is sure about it too.

How will we know that we have deflation? Wouldn’t prices have to start falling?

Bugs – why will the lenders go under when foreclosures rise? Didn’t they sell the loans to investors? I think the lender problem has more to do with falling sales, but I am not sure. Which lenders keep their loans?

[privatebanker]

Bank’s that sell their loans typically have a clause with the mortgage back security holders that if there are nonperforming loans in the securitized package, the bank has to buy them back, not sure if it’s all or a certain percentage. This could really create some problems down the road. A lot of smaller banks portfolio their loans. I know of several that are at serious risk. Some losses can be minimised through the use of credit default swaps but there’s no guarantee.

[barnaby33]

What does, “portfolio their loans mean?”

Josh

[privatebanker]

When a Bank portfolios a loan it means they originate, service and hold the note until maturity or when the note is paid off. These are the banks that will typically offer really high deposit rates in order to continue to have money to lend out. This could be an interesting thing to watch as this market (real estate) begins to fall apart. I wouldn’t be caught having any deposit accounts at these little banks. They may not be around in a few years. Sure FDIC will refund your money but I would imagine that’s a lengthy process and a lot of documentation.

[powayseller]

Time for me to get my money out of World Savings…They’ve been offering the highest rates for a while. Back in March, their rates were higher than anything I could find on bankrate.com. They own GoldenWest, CA’s biggest subprime lender. I assume they portfolio their loans. I plan to buy Treasury bills in September, when my CD is up. (Or buy into that stock rally that might set up in the fall?)

[Author]

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