I have been dismayed about the latest actions out of Washington and Wall Street. The banks are now pushing all manner of mortgage mods and foreclosure abatements. These are little more than “extend & pretend” measures, designed to put off the day of reckoning. They are not only ineffective, they are counter-productive. They reward the reckless and punish the responsible, and create a moral hazard. Worse yet, they penalize middle America for the sake of giant Wall Street banks.

It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) is to allow the foreclosure process to proceed unimpeded.  We need more, not less foreclosures.

How did we get to this bizarre place in history? A brief recap of our story so far:

It started with the ultra-low rates of 2001-04. It was aided and abetted by an abdication of traditional lending standards, at first by non-bank lenders, but eventually, by nearly all. The Lend-to-Sell-to-Securitizer NonBanks pushed lending standards ever lower to the point of non-existence. This increased the pool of potential mortgage buyers, credit worthiness be damned.

The net result of all this was a credit bubble. I estimate that making mortgage requirements disappear  brought between 10 and 20 million marginal new home buyers into the real estate market during the 2,000s decade. This drove prices to unsustainable levels, leading to a huge boom and eventual bust cycle in housing.

Prices have fallen about 30% nationally from the 2005-06 housing peak. As the artificial demand created by free money and an accompanying gold rush mentality disappeared, the housing market collapsed.

Despite this, even down 30% or so, prices still remain elevated by historical metrics. The net result has been 5 million foreclosures and counting. One in four “Home-owers” are underwater — meaning, they owe more on their mortgages than their houses are worth. There are another 3-5 million likely foreclosures coming over the next 5+ years.

The net results of the credit bubble are as follows:

1) An enormous number of families living in homes they cannot afford.

2) Bank balance sheets laden with current bad loans and lots of potential future defaulting loans.

3) Real Estate Sales, despite being propped up with historic low mortgage rates and tax purchase credits, are continuing to slide.

4) A weak overall economy with a very slow, soft recovery.

Whether a function of populist politics or bad economics, the proposals so far appear to address items one and three. But upon closer examination, they do nothing of the kind. In fact, they are actually gaming the system to help issue two — the bad loans the banks are carrying.

Even worse, they are making issue #4 — the economy — increasingly problematic.

We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.

We own a home, and have a vacation property. Rooting for falling prices is “talking against my own book.”

Why is it so beneficial to allow foreclosures to proceed unimpeded? Consider the following benefits of foreclosure:

Increasing Economic Activity: The areas of the country with the greatest foreclosure rates have seen the biggest increase in real estate activity. Look at California and Florida — they have seen enormous upticks in sales versus the lower foreclosure states.

The process moves real estate holdings from weak hands to stronger ones. When someone purchases a home they actually can afford, they end up spending quite a bit of money on additional goods and services. They do renovations, hire contractors, make durable goods purchases, buy cars. They do lawn work, plant gardens, paint and repair. They even hire  baby sitters, go out to diner and movies, they spend money in the local community.

The people who are hanging on by their fingernails, however, do almost none of these things. They pay a vastly disproportionate amount of their incomes to service their mortgages. This is not productive economic activity.

Helping Families: Foreclosures, wrenching thought hey may be, move over-stretched families into housing they can afford. They avoid a steady stream of all manner of excess fees. The banks squeeze whatever they can from delinquent homeowners, who end up futilely tossing $1000s of dollars down the drain.

Worse, the HAMP programs have been totally ineffective in keeping families in their homes. The vast majority ultimately default anyway. More fees paid, more debt accrued, for nothing. The last thing these families need is a banking fee orgy, before they ultimate lose the house anyway.

The HAMP programs have been an enormous taxpayer subsidized boondoggle for the banks, however.

Punishing the Prudent: The boom and bust saw irresponsible and reckless behavior by lenders and home buyers alike. They overused leverage, disregarded risk, ignored history. Having the taxpayers subsidize this behavior presents a moral hazard.

Worse than that, it punishes the people who behaved prudent and responsibly. Those who refused to buy a home they could not afford, chose not to over-extend themselves, and have been saving for a down payment are the net losers in this.

By working so feverishly to artificially reduce foreclosures and prop up home prices, we punish the first time home buyer, the newlyweds, the savers who want to buy a house they can actually afford.

The net result of all these programs and subsidies for recklessness is that we prevent home prices from normalizing. The people who are punished the most are the group that was not reckless, speculative or foolish.

Rewarding Bad Banks: Despite the helping families rhetoric, it is not what these mods are about. The various foreclosure abatements, mortgage mods and capital write-downs are little more than a game of kick the can down the road. All of these programs are part of a broad “Extend & Pretend” mind set. They are an extension of the FASB 157 rule changes that allows banks to hide their bad loans.

The entire set of proposals canbe described as “Whats good for the banks is good for America.” Only they are not. The various foreclosure programs are essentially a way the banks don’t have to take their write offs now. Avoid the hangover, have another shot of tequila, push the pain of into the future, regardless of economic cost.

Were the banks required to report their mortgages accurately and/or write them down, they would be revealed as insolvent.


Now we get to the ugly Truth
: The mortgage mods and foreclosure abatement programs are really all about propping up insolvent banking institutions on the taxpayer dollar and at the expense of the middle class. These programs are another losing round of helping Wall Street at the expense of Main Street. It is the worst kind of trickle down economics.

Herbert Spencer wrote, “The ultimate result of shielding men from the effects of folly is to fill the world with fools.” We have done precisely that.

It is time to stop punishing prudence
John Plender
FT, March 24 2010 18    

Bank of America to Reduce Mortgage Balances
NYT March 24, 2010

Bank Launches Big Plan to Cut Mortgage Debt
WSJ, March 25, 2010

The Housing Crisis and the Resentment Zone
Economix March 24, 2010

Category: Bailouts, Credit, Real Estate, Really, really bad calls, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

99 Responses to “More Foreclosures, Please . . .”

  1. They owe more than than the house is worth, hence the term “home-owers” rather than the traditional “home-owners.”

    Or, you can call it rent with an option to default . . .

  2. GreenTom says:

    Thanks for posting this. As an ex- (and hopefully future) New Yorker, it really galls me that I may never again be able to afford to own a place in my hometown, simply because I choose not to buy something I couldn’t afford.

    Still seems like NY real estate has a long way to fall: rent vs. buy metrics are nowhere close. Even though I know there are a lot of people making a lot of money in NY, it’s hard to believe that there are really enough people making $250k+ to fill all of Manhattan and downtown Brooklyn.

  3. Michael M says:

    What is interesting to me is that house prices have dropped dramatically in many countries around the world, but to the best of my knowledge the US is nearly the only country that tries to massively bailout the underwater home “owners”.

    Any international readers who see such programmes in your own countries? On a similar scale?

  4. investorinpa says:

    I love the “rent with option to default” lingo…other sites call them home debtors. As an aside, really good opinion posted here on this foreclosure mess. Somehow, I don’t see the gubmint doing anything except keep trying all the wrong approaches. Obaaaaaaammmmy gimmmeeeeeee cheeeeeeeeeeese seems to be their approach to everything.

  5. torrie-amos says:

    it’s a vicious circle and the gubment knows it, if u let home prices go down, so does taxes for state and muni’s who are already busted, it is why fasb 157 has been nullified until 2012, they buys them time to digest the mess, plus CRE

    never underestimate the guys at the top, extend and pretend and ye shall mend, that is the game plan, u just need to connect the dots

    yellin in a speech mentioned zirp might be around til 2013, hmmmmm

    it’s a battle royale with cheese, soveirgn debt, and interest rates

    still say 85 oil kills all, and right before it’s ready to explode higher, my oh my we got 5 million build

    best drama in the world

  6. “…• Rewards the Banks: Despite the helping families rhetoric you hear, they are irrelevant. The various mortgage mods and cramdowns are little more than a game of kick the can down the road. All of these programs are part of a broad “Extend & Pretend” mind set. They are an extension of the FASB 157 rule changes that allows banks to hide their bad loans.

    The various foreclosure programs are essentially a way the banks don’t have to take their hits now. Were the banks required to report their mortgages accurately and/or write them down, they would be revealed as insolvent.
    Now we get to the ugly Truth: The mortgage mods and foreclosure abatement programs are really all about propping up insolvent banking institutions on the taxpayer dollar at the expense of the middle class.

    These programs are another losing round of helping Wall Street at the expense of Main Street. It is the worst kind of trickle down economics that has been seen in decades . . .”–BR, above
    “..Were the banks required to report their mortgages accurately and/or write them down, they would be revealed as insolvent..”
    ” Truth: The mortgage mods and foreclosure abatement programs are really all about propping up insolvent banking institutions on the taxpayer dollar at the expense of the middle class.”

    that’s, quite, it, in a nutshell.

    ol’ Ramp n’Crash has, always, been a Game to game the Middle Class–and wipe it out.
    What we’ve been witnessing is, little more than, a reprise of ’29-..
    even much of the rhetoric could be culled from back then, and be slipped, un-noticed, into today’s welter of disinfo..

    it’s a funny Joke, from a certain perspective, but the crude *Reality is that the ediface was rigged to blow, Innocents were, truly, murdered, and the PerpeTraitors are, still, being, amply, Rewarded–instead of being Amped, in a Chair..
    “..A popular slogan of the Italian Fascists under Mussolini was, “Tutto nello Stato, niente al di fuori dello Stato, nulla contro lo Stato” (everything for the state, nothing outside the state, nothing against the state). I recall this expression frequently as I observe the state’s far-reaching penetration of my own society.

    What of any consequence remains beyond the state’s reach in the United States today? Not wages, working conditions, or labor-management relations; not health care; not money, banking, or financial services; not personal privacy; not transportation or communication; not education or scientific research; not farming or food supply; not nutrition or food quality; not marriage or divorce; not child care; not provision for retirement; not recreation; not insurance of any kind; not smoking or drinking; not gambling; not political campaign funding or publicity; not real estate development, house construction, or housing finance; not international travel, trade, or finance; not a thousand other areas and aspects of social life…”

    We should be asking: “What are we paying for?”, and, maybe: “Why are we funding our own abuse?”
    Has anyone come up with a stronger variant of “Stockholm Syndrome” to describe our, Polity’s mindset?

    just a reminder, you can handle my Voir Dire, anyday~
    and, from previous thread, note that ‘dude’ was, just, part of the riff..
    you’re way past, mere, ‘dude-dom’; you’re a Mensch–sadly, for us, one of the far, too, few..

  7. rktbrkr says:

    Now comes the BAC fineprint about the mortgage writedowns. Aside from the stampede of people looking to position themselves 60 days behind this won’t do anything except stretch out the defaults via the forgiveness streched out over 5 years. This won’t do anything if not in concert with the other major mortgage cos


  8. flipspiceland says:

    It’s all interconnected as Torrie illustrates above and as such is incapable of being solved other than to one person’s advantage or another and just about everyone knows who they are.

    It’s like the economy is merry-go-round on steroids and you’re blind, and as money flits by you either take a risk and reach out and hope to snag some, or get your wrist or worse, broken.

    Only the relatively few insiders can put their money up (or more likely that they borrow at no interest with a government co-signers (read: people of the unUnited States) and get a guaranteed return ON and OF their capital.

    The rest? Well, how did it turn out for the ones who were not Friends of geithner,orszag,bernanke,
    summers, paulson, greenspan,rubin,friedman,fuld,frank,thain,prince, dodd,mozillo,o’neal
    gensler, cassano, blankfein, yellin, shapiro, fink, kashkari,clinton,bush?

  9. Mr.E. says:

    A couple of weeks ago when Lender Processing Services released their latest report they showed 7.5 million homes delinquent/in foreclosure process. By my back-of-the-envelope estimate that amounts to about 18 months of home sales that have not yet come to market just from the foreclosure pool alone. After I picked myself up from the floor my reaction was “no way – that’s too insane”. But I have yet to be able to discredit that estimate, if the 7.5M number is right.

    Bernanke, in previous testimony before Congress, was clear that the objective of Fed and Treasury policies was “to give banks time to heal their balance sheets”. As best I can tell, mortgage failure and the write-downs that would ensue is a big part of that concern.

    There is an additional spill-over hazard in the economy. To the extent that delaying ultimate failure retards economic activity it depresses government revenues (barring policy changes). This is becoming a real problem at both the Federal and State levels and stands to hurt everyone. Yesterday, in a report on economic spread to education NPR stated 23,000 pink slips have been handed out to CA teachers (up from 22.000 last week).

  10. [...] More Foreclosures, Please… (TBP) tweetmeme_style = 'compact'; tweetmeme_service = 'bit.ly'; tweetmeme_source = 'ReformedBroker'; View the discussion thread.blog comments powered by Disqus [...]

  11. cognos says:

    FASB 157 – was a big part of the PROBLEM. Why do you guys like this? All it does is promote bubbles (mark it up!) and busts (mark it down, its all “toxic”). Oh wait, lots of “toxic” stuff is up from 10 to 90.

    That was one of the dumber ideas ever. “M-T-M” for illiquid assets. Its like foreclosing on homeowners who are current on payments. They are M-T-M bankrupt!

    I’d like to see MATCHING principal write-downs. That is… IF you have a key troubled mortgage… for every $10k you pay down, the lender matches $10k, the govt matches $10k.

    See… in commercial real estate we have VERY FEW foreclosures. Because it is better to negotiate than foreclose. But its much easier to negotiate a $100M property… you cannot put 3 lawyers on a $300k loan (that should be $150k). So you foreclsoure, and after fees and costs… collect $50k. Who does that work for?

  12. ….and now people are offing themselves when the sheriffs show up

    Foreclosure Threat Drives Some to Suicide
    Economic Crisis Turns Even More Grim as Two Philadelphia Homeowners Take Own Lives before Evictions


    Take THAT one to your grave Greenspan!

  13. HTCMSI,

    thanks for providing the background to my reference, above..

  14. Shnaps says:

    Great stuff, as usual. Although I suggest you hire an intern to clean up the typos and such. Maybe it’s just me, but it seems like your posts are a lot sloppier now than in years past. I hate to see that kind of stuff distract from what is otherwise blogging gold…

  15. Marcus Aurelius says:


    You hit this one out of the park, my man. Cogent, all inclusive, and not cryptic (sometimes, you are cryptic). Kudos and accolades to you.

  16. Mike in Nola says:

    A column in the Houston Chronicle yesterday had a rant about the other big transfer of wealth: that from seniors to banks because cd’s pay nothing anymore so the banks get to speculate with interest free loans from seniors who have saved and need the money for retirement.

  17. cognos says:

    MEH -

    You post makes no sense and is factually WRONG.

    1. Banks are required to report “non-performing loans” (NPL). Every major bank reports this. Fannie/Freddie report this. This number is not enormous. Its about 5% If every NPL defaults and recovers zero… many banks are still ok. Most major banks have about 1.5x NPL in loss reserves.

    2. You seem to not understand how “credit” and especially “risky credit” works. It earns interest… say 6% on an avg mortgage. Of which 3% pays for the risk-free cash… and 3% pays for the risk. Over 10-yrs this leaves 30% to pay for losses. Now in many historical periods there are very few losses, say 10%. So lending on mortgage is just a free extra 20%. But every so often we have a crisis (see 2008)… and in this case the losses were more… say 30%. Now locally… over just 1 or 2 years… this looks really serious. But if you spread it out over 5 years. Its much more managable. And in the big scheme of 10-yrs of spread… its just “fair”.

    For 70 years… thats how banks worked. They smoothed the interest / credit loss dynamic through accrual accounting. For the first time in 70 years some dumb regulators wanted to push for MTM (capitalism solves everything right? let the power of the market work for us!). This added gasoline to the crisis… and made speculators (like me) lots of money. So sad.

    3. Banks are starting to look great. Credit losses are dropping while they have large earnings elsewhere that are more than supprting the existing position. Sooner or later the excesses from the prior crisis are mainly worked through the system… credit cycle turns and this will drive financial earnings much higher. Many risky bank stocks are up 30-60% this year… as the data looks good. Dick Bove just said… this is now turning and many banks stocks will return 4x.

    Do you look at data? markets?

  18. cognos says:

    Mike in Noha —

    Seniors can always lend their money to someone else (besides a bank). Just find someone that needs a home loan… and provide the mortgage and take the credit risk. Or start buying cheap houses and renting them out.

    Risk-free FDIC insured money doesnt “deserve” more interest. Risk = return.

  19. Nightbreed says:

    Michael M….. different morgages here but it still can be and will be a problem here to.

    gr N

  20. Scully says:

    Spot on Barry. As long as there’s debt…there is no own.

  21. powerpenguin says:

    I agree with most of the post, but I don’t think it’s quite as bad as you think it is.

    First though, one thing was left out; banks generally hold off foreclosures for two reasons, one you mention, that they can probably squeeze a little more out of the owner before they leave, and if no one is there to replace them something is better than nothing. But don’t forget, occupied houses depreciate in value slower than abandoned ones. That is to say, it is in the bank’s best interest to have someone living in the property they own, purely in terms of the house’s value.

    Now, then,

    “Increasing Economic Activity: The areas of the country with the greatest foreclosure rates have seen a big increase in real estate activity…when someone purchases a home they actually can afford, they end up spending quite a bit of money on additional goods and services…”

    I’m not so sure I agree with the premise that foreclosures are the cause behind the increased growth. yes growth and foreclosures are correlated, but did the foreclosures cause the activity, or did the banks foreclose because they realized there were potential buyers, and thus potential economic activity. If it’s the later, foreclosing in areas where there aren’t potential buyers won’t help.
    Also, I don’t have numbers to support this, but based on some of the articles I read, it seemed that a lot of the “real estate activity” as a result of the foreclosures was more due to the houses changing hands from banks to real estate investors in the form of auctions. I don’t think this really changes anything.

    “Helping Families: It moves over-stretched families into housing they can afford…”

    If they can find housing they can afford in this market! Even if it is possible to downgrade to affordable housing, good luck finding a lender when you’ve a default on your credit record. If they already know they are going to walk, they aren’t going to be buying anything for a while. Which means they are going to be renting, so why not just rent with an option of defaulting the house you already have? Like I said before, the banks have an interest in keeping someone in the house, so I doubt they get a bad deal.
    All in all, if someone has decided to default and can find affordable housing, I think they would have already taken it.

    “Punishes the Prudent…”

    Really? I don’t quite follow the reasoning for this. Given that the rain of the housing collapse falls on the prudent and the imprudent alike, I don’t see how preventing housing prices from falling to their absolute bottom really helps the imprudent more than the prudent.
    The real winners are the prudents who didn’t buy a house! Unless of course they bought equities…

    “Rewards the Banks…”

    Perhaps, but at the end of the day, it’s up to the banks when to foreclose or not, as they own the houses. As for kicking the can down the road, that’s true, but the real issue here is can the banks hold out until the economy burns through the surplus houses. Since houses basically aren’t being built at all now, I think the consensus is that we will be out of the surplus supply around mid next year.

    Those are my thoughts. I may very well have misread some of the original posts.
    Please let me know what you think everyone!

  22. 32 Feb says:

    good article barry. people need to know there is risk when you borrow money and lend money on poor terms

  23. theorajones says:

    I have problems with this.

    If you want to promote foreclosure as a solution, you have to be honest that we suck at foreclosure and it is incredibly inefficient and adds on all kinds of new losses that wouldn’t exist in the absence of foreclosure. To name a few:
    –People become very angry when their homes are foreclosed upon, and often do massive damage to them.
    –The market in home goods gets deflationary, because people in foreclosure are having a fire sale on everything they can’t take with them (normally not a big deal, but we are talking about a massive scale of foreclosure. It would be a contributor to national deflationary spiral we’re desperately trying to avoid because it would crash our economy).
    –Consumer protection laws mean people can stay in their houses for a very long time with payments in escrow, creating a capital problem.
    –It’s disruptive to kids’ education (a minor point, but one worth making).
    –Banks let houses stand vacant instead of putting them on the market, so they don’t have to write down the loss, and vandals, gangs, drug growers, and other people looking for crime sites move in–which increases the policing costs and which decreases the whole neighborhood’s value.
    –People are fearful of buying a home in a neighborhoods with a foreclosure, because of the “foreclosed houses tend to stand abandoned for a long time” problem and they don’t want a pot house next door. Thus, the inefficiency of the foreclosure market lowers the value of _all_ homes in a neighborhood below what they should be.
    –The foreclosure sales market is spectacularly slow and dysfunctional. The only people who can really navigate it are professional foreclosure flippers. I don’t see why we’re screwing the banks by having them accept a much-lower-than-market price through the foreclosure market so that a bunch of rentier middlemen can make money.

    What’s the real downside to encouraging mortgage mods with the principal reduced as a preferred choice over foreclosing on a house and selling it at a lower price? I get that the market isn’t setting the price because you have only one buyer, but the because it’s so dysfunctional the foreclosure market will, almost by definition, create a too-low price, with all the differences between that price and the true market price lost to the rentier class of foreclosure flippers.

    Seems to me that if banks looked first to mortgage mods for underwater borrowers–lowering the principal–and then viewed foreclosure as an last ditch option only if the debtor was a total mess, we’d have an acceptable solution in terms of coming pretty close to the real price of the home or slightly above, and a MUCH better solution in terms of avoiding all the bad effects mentioned above.

  24. DeDude says:

    The initial argument to postpone some of this because we were in a financial panic and it could push us into a depression was reasonable. However, at this time there is no big risk of panic, just a lot of realities that must be faced sooner or later. I agree that most of the benefits of any help ends up with the banks. If we really want to help home owers, we need to change bankruptcy laws. In way to many cases the sensible thing to do is to reduce the principal and change terms of a loan to make it affordable. But the slicing and dicing of loans make it impossible to negotiate a deal between the owners and loaners, even when it clearly is a better alternative to foreclosure for both parties.

  25. carlwied says:

    Spot on. Ritholtz for President!

  26. Scott F says:

    Speaking of gimmicks, try this one on for size: On Tuesday, California approved a “$10k tax credit for certain homebuyers at a cost of $200 million to the state’s beleaguered budget. The bill applies to buyers who haven’t owned a home in the last three years or who are buying a newly built home. The tax credit would take effect on May 1, immediately after the federal tax credit expires on April 30.” …


    Geez, they are giving priority to a “newly built home”.

    I cannot for the life of me understand how the State of California can justify a cost of $200 million to stimulate home building. Rates are rockbottom. The federal government has a giveaway. And California which is tapioca for all intents and purposes, is now doin’ a $200 mil giveaway of their own. For what? Housing does create jobs, true, but it is not a major driver of employment.

  27. CTB says:


    “What of any consequence remains beyond the state’s reach in the United States today?”

    Aren’t you really saying that every industry and aspect of life has associated laws? Is that such a bad thing? One could argue against government over-involvement, but absence of involvement would be pretty bad. You had me at first, but the conspiracy meme is tired. Been, Watching, Glenn, Beck, too much?

  28. theorajones says:

    “it’s hard to believe that there are really enough people making $250k+ to fill all of Manhattan and downtown Brooklyn.”

    In 2000, of the 3 million households in NYC, 110,000 had income over $200,000. I’m sure that number is much higher in 2010.

    It’s not that hard to believe that more than 110,000 households plus the wealthy pied-a-terre buyers from cities all over America and throughout the globe, plus the lower income people who are able to stay in apartments in expensive neighborhoods because of rent control add up to enough to fill all the available housing in the popular parts of Manhattan and downtown Brooklyn.

  29. DeDude says:

    CTB, spot on. It is completely idiotic to complain that government is involved in everything. Off course it is. Without laws you have anarchy. The human condition is one of constant conflict as one tries to get more than another. Civilized society provides the only way to resolve those conflicts at a minimal cost to everybody. You must have someone ruling the unruly and democratically elected officials provides the only fair body to do that.

  30. Deborah says:

    I think the problem with letting the foreclosure problem play itself out is that the banks are insolvent and there isn’t insurance money to cover the losses. The money the banks lose in letting the foreclosure process play itself out is people’s savings. Yes it is extend and pretend, but the mortgage modifications that keep people playing for mortgage that should not have happened even at a 20% loss is less then the 50% loss the banks would take in the foreclosure process.

    It just seemed to me when I thought this thing through what was “needed” to prevent collapse of the financial system — ie you go to your bank and you can’t get your money because the moron bank loaned it to someone who had zero hope of ever repaying it and now the bank is insolvent as is the bank insurance because most banks are insolvent if the issue is forced — was masses numbers of debt slaves who keep paying despite that their best interests are to start over.

  31. Boots or Hearts says:

    Very, Very well stated BR.

  32. The Curmudgeon says:

    I believe what MEH means, in regards to what sphere of human activity is beyond the reach of the long arm of government, is that, instead of creating the infrastructure necessary for economic activity and decisions to be made by private actors–i.e., a system of laws (both private, i.e., contractual, and public) and mechanisms for its enforcement–it now has a heavy hand in every last decision, attempting to direct final outcomes to suit its purposes. This centralized, bureaucratic strategy of making economic decisions has been tried numerous times in history, and has always failed. (see, e.g., the Soviet Union, the PRC, etc.) Human beings are fantastically less predictable in their wants, needs and desires than are herds of sheep, yet the philosophy behind this sort of social engineering effectively considers humans as nothing more than stock animals.

    Allowing foreclosures to ripple through and effectively destroy the residential mortgage and housing markets is the only long-term hope for a reasonable, sustainable revival in the market. This is also true of the banking system that generated this mess. Old growth must be cleared before the light necessary for new growth can reach the forest floor.

  33. Mannwich says:

    Great post, BR. We now take the right thing and do the exact opposite – - in so many areas of our economy and country. Not good times.

  34. cognos says:

    Deborah –

    No bank loses “people’s savings”.

    The banks are not insolvent. Do you see that BAC and C (the stocks of Bank of America and Citibank) are up 400% since 1-yr ago? Bank stocks of BAC, WFC and JPM are each worth OVER $150B. Citibank is worth $122B.

    Small regional banks and mortgage insurers stocks also look very strong YTD – ZION (+82%), HBAN (+50%), RF (+50%), MTG (+63%). These stocks are also mainly up 200-400% since 1-yr ago.

    Why would you or anyone think — “banks are insolvent”?

  35. bsneath says:

    BR, I completely agree with your points – as long as one assumes that we are going through a difficult albeit reasonably typical economic cycle where the forces of greed and excess are purged, irrational behavior punished and prudent behavior rewarded. Without doubt the government programs that help homeowners are also serving to bail-out banks. In doing so these programs create a moral hazard that discourages self-discipline within the financial sector.

    Perhaps I give them too much credit, but from my perspective the financial industry is the most culpable party in the housing market/foreclosure episode. They created the financial products that enticed homeowners and consumers to engage in reckless behavior. They succeeded in compromising the rating agencies by playing one against the other and by offering enticing fees on mortgage backed security offerings. They succeeded in changing our laws and regulations – effectively eliminating interest rate ceilings, reserve requirements, regulation and oversight. It is wrong from both a free market and in my mind a moral perspective to bail out these firms. To do so promotes all sorts of inappropriate behaviors that will do great harm in the long term.

    However, if the economy is not undergoing a severe but never the less typical business cycle, but rather is and continues to be on the precipice of an economic collapse, then these government homeowner programs are perhaps a distasteful but necessary medicine. Chemotherapy for the cancer patient.

    Whether or not this is the case depends on the economic consequences. What would be the consequences if the government stepped away and allowed market forces to dictate housing prices, foreclosure levels and banking costs/failures? Would the actions of efficient markets and creative destruction serve to quickly reprice assets, clean out excessive inventories of housing stock and purge the system of irresponsible banking practices so that the economy can once again grow? Or are the excesses of such a great magnitude that the market would excessively over correct on housing prices, force large numbers of responsible homeowners into foreclosure and bankrupt the responsible/well managed banks?

    You asked your flock last year to define the difference between a recession and a depression. My answer was that a recession results in the destruction of poorly managed or inefficient assets (aka “creative destruction” which is good but a depression results in permanent destruction of the very creative assets that are needed for long term economic prosperity, which is bad.

    If the government were to “stand down” on housing and the result was still a recession, then this would be the correct action to take for long term economic growth. However if it resulted in a depression, the consequences might be permanent damage to the economy that would impede long term growth. I personally am not yet confident enough in the long term economic prospects to agree with pulling the plug on these programs.

    Until it is more certain that we are not at risk of economic collapse, I would rather see meaningful financial reform to prevent future excesses, honest accounting to identify the failed banks, allowing them to be taken over and unwound, and a continuation of homeowner programs as a measure to avoid permanent long term economic destruction.

  36. rktbrkr says:

    So CITI is allowing some homeowers to stay on in their heading to foreclosure homes for free for 6 months and and BAC is renegotiating principal writedowns with some deeply underwater homeowers presumably to keep them from walking away.

    One unintended consequence of all of this is that you have to stop paying your mortgage to get their attention.

  37. Marcus Aurelius says:


    RE: Bank insolvency:

    You have come unhinged. After we put in $1T to save these worthless shits, they still hold many times that amount in worthless securities that must still be unwound. The black hole of bank created debt has been put onto the backs of the public, and because that floated the banks stock market value for a year, you claim they are solvent?

    You have lost any shred of credibility. You didn’t have much to begin with.

  38. Mannwich says:

    Someone is using Dick Bove’s call on the banks to justify their financial health? THE Dick Bove, who didn’t see any of this mess coming in the first place and was telling people to buy LEH and C all the way down the shute? That is just too much, even for your cognos.

  39. cognos says:

    Marcus A –

    What are you talking about?

    1) The govt lent about $400B in TARP funds to banks… at 5% preferred interest (accelerating to 10%) and received warrants in return. The govt has been >75% PAID BACK on this money already. And it looks like the TAXPAYER will GAIN about $50B from TARP to banks.

    Did the govt provide “loans in crisis” to preserve the system against a self-feeding crisis – YES. Is anything “on the backs of the taxpayer”? No!

    2) “They still hold many times that in worthless securities” – NO! This is 100% false. Again, as I stated above — ALL major banks reports ALL “non-performign loans”… these are at high but very manageable level.

    Do you understand how much “toxic debt” that was priced at 5 cents, 10 cents, 20 cents on the dollar 1 year ago… is today at 80-90-100? Its like your living in Q1 2009. Debt markets and banks solvency looks good.

    Do you look at markets / data at all?

  40. The Curmudgeon says:

    “Why would you or anyone think — “banks are insolvent”?”

    Hmm. Is this a trick question? It’s too easy. A bank is insolvent when its liabilities (i.e., for commercial banks, its deposits) exceed its assets, i.e., mostly, performing loans. When a loan is non-performing, the loss must be capitalized through retained or future earnings. Why would I or anyone think that banks are insolvent? Because I don’t believe the banks’ assets are being realistically valued, due partly to accounting rules, and due partly to accounting shenanigans, like off-balance sheet entities (see, e.g., Lehman Brothers before its collapse). Without zirp, most every large bank would be unprofitable, and would thereby not have the retained or future earnings for filling its capital holes, which as noted, are bigger than reported.

    Every time bank stocks go up, I just add a little to my tidy pile of FAZ. The financial crisis is not over. Bank balance sheets are as bad as ever, but the Fed is fraudulently papering over the problems. The crisis won’t be complete until the federal government has finally nationalized the entire sector. But enjoy the fraud, like we did in 2007, until it is revealed again as such.

  41. Robespierre says:

    “I’d like to see MATCHING principal write-downs. That is… IF you have a key troubled mortgage… for every $10k you pay down, the lender matches $10k, the govt matches $10k.”

    Why in hell should the tax payer foot the bill for $10 “matching”? Of course you will like to see that after all nothing better than have the tax payer pay for bankers loses. What I will like to see is people who do not pay get foreclose and have the bank eat the loses for the bad bet they made

  42. cognos says:

    Robespierre –

    Why does the govt get to TAX us to pay for anything — education, defense, medicare, social security, hurricane/flood/earthquake disasters, roads, consumer protections, environmental protections, police, fire, etc?


    Because the whole system would be better off. If the US govt matching cost say $300B (~1 months govt budget) and that caused $1T in mortgage pay down and the entire crisis to be over (ooh… $1T in extra taxes, yeah!).

    I think it would fix the crisis, from the bottom up, and make a better outcome for all — jobs, taxes, stability, etc. Complete perfect “fairness” is low on my priority list. The govt has some significant responsibility to bear in this crisis and therefore can PAY as opposed to LEND some $.

    But this is largely irrelevant — the crisis is over.

  43. cognos says:

    Curmudgeon -

    But “non performing loans” are just not that high. On the basis you described FEW banks and NO major banks are insolvent.

    Course, you knew this… which is why you put the line in about ZIRP. Yeah, “if x, then.. “. But the “if” is not true right? ZIRP makes alot of sense… and is here to stay until the recovery is so strong that it has closed the output gap.

  44. Winston Munn says:

    “Do you understand how much “toxic debt” that was priced at 5 cents, 10 cents, 20 cents on the dollar 1 year ago… is today at 80-90-100?”


    From what source did you collect this data about pricing? What market is currently trading these securities? Also, if the security pricing has normalized, what is the problem with FASB 157?

  45. Robespierre says:

    cognos Says:

    “But this is largely irrelevant — the crisis is over.”

    May be for the bankers but not for the population at large.
    So since you are all the “public good” sacrifices and all that I can only assume that you would have no problem on creating a temporary tax that targets “current wealth” (not income) of say %20 of individuals whose wealth is > %50M right? and use that to pay for the matching you so in favor of…

    Wait my guess is you will find a capitalist reason not to do it …

  46. markwax says:


    Removing “mark to make believe” renders BofA and Citi “insolvent”. If you have eveidence to the contrary please provide. Of course, we are not certain of the pace of debt destruction, but this is a $13 trillion hole in the economy. A number only previously known to astronomy.

    The longer we wait to let the market clear and break up Citi and Bof A, ( or nationalize them) the longer the broader economy will languish. California is slowly dying and Michigan is in a depression.( Detroit resembles Beirut).

    I do the math and I can’t see anywhere near the value level of the S/P above 700-900 over five years.

    The operation was a success, but the patient died.

  47. beaufou says:

    I’m sure unscrupulous characters will find a good reason to default and get a better deal even though they can make the payments.
    As for the banks, well the milking cow will only have two tits for a while, might as well take it for now.

    The situation amuses me less and less everyday.

  48. couragesd says:

    I also think that there are a couple pieces of the equation missing in the need for more foreclosures to happen. Those are the real estate agents and the appraisers that were getting kick backs to keep pushing property prices up. My wife and I casually look for homes and are pre-approved for a price range that fits our budget. I would consider us middle class (making beyond the median for the majority of the country) but I guess according to some we are the abject poor.
    Real estate agents just don’t want to swallow the fact that prices need to come down in san diego. Several that we talked to hardly returned our calls or treated us like a disease when we discussed our price range. They want to make the big sell, they also want to keep the prices inflated so they can keep making that commission. This part of the system is also broken.
    There is also a culture of real estate officers talking about buying for investment so that you can sell again later at a higher price. Well, what if I wanted to buy a home and as Barry suggest invest in the economy by hiring contractors or eating at the local restaurant. In some of the neighborhoods in san diego that were considered a “good investment” the hood stays economically depressed and crime ridden. That may be because there are not individuals investing in the community because they are in a money pit.
    I am actually intrigued by the Redfin.com model. The real estate agents do not work on commission but are salaried. Being a bit of cynic, I do wonder if they work on some sort of an incentive program; but it does seem to be a solution to one of the problems with the current real estate market. My wife and I did find a real estate agent that we semi-appreciate, so out of loyalty we are sticking with him for the time being until I tire of my loyalty when I he likely has very little. Next up is redfin.

  49. cognos says:

    Winston Munn — FASB 157 is one of the great dumb ideas that caused or exacerbated this crisis. Note… we did not have bank “mtm” prior to 2006. Hmm? Its just a dumb idea. You cant m-t-m for illiquid assets — homes, real-estate debt, project finance. Accural account is much better. No mark-ups in the good times. No mark downs in the crisis.

    Data on bonds:
    GGP (a mall REIT) converts priced at 3 cents at the lows, today they price at >100.
    Lyondale (a busted chemicals LBO deal) bonds priced at 7 at the lows, today they price above 90.
    JNK is a HY credit ETF… its up >50% since the lows. An index ETF fund of HY credit.

    I dont have the data in front of me… but subprime tranches are up 50-70% in 1 year. Again… last years “toxic asset” then returns 100%. This is financial speculation. The future is UNCERTAIN!

  50. [...] On the benefits of MORE foreclosure activity.  (The Big Picture) [...]

  51. markwax says:


    Suspended disbelief is not an accounting function.

    The future is NOT uncertain. Money doesn’t get created from thin air without a consequence.

    When the music stops someone is going down. This time I fear that it is the U.S debt market and our currency with it.

  52. destor23 says:

    Forget moral hazards, there’s another principle at work here: odious debts. Banks loaned people money so that they could buy overvalued homes. The only answer is principal reduction — a big do-over that reduces the value of the loan to a more realistic appraisal of the house. This sets a new, lower floor for home prices and the only people hurt are the banks, which is how it should be.

  53. Winston Munn says:


    Didn’t banks have the option whether assets would be priced as held to maturity or as liquid assets? I do not dispute that FASB 157 is a poor idea for illiquid assets, but my understanding is that the banks had a choice.

    “I dont have the data in front of me… but subprime tranches are up 50-70% in 1 year.”

    I understand the unavailable data, but this is the data I am most interested in seeing. What tranches are you speaking about? It is a given that the mathematics of the trache constructions automatically raised the lower-rated tranches’ values – but it obliterated the AAA tranches. A drop from 98 t0 70 on a AAA tranche purchased with 20:1 leverage = insolvency.

  54. DeDude says:

    “Allowing foreclosures to ripple through and effectively destroy the residential mortgage and housing markets is the only long-term hope for a reasonable, sustainable revival in the market.”

    As in “the only way I can possibly remodel my house is to tear it down to the foundation and build it up from scratch”? I need a new roof and new siding and really should remodel the kitchen. Yet each of those projects would only come to about 1/3 of what building a new house on the old foundation would cost. Furthermore, I do not have one chance in hell of affording to build a new house, whereas I could probably afford the roof this year, siding next year and a new kitchen in 5 years.

  55. [...] Foreclosures, please… (The Big Picture) Barry Ritholtz pronounces bank mortgage mods and foreclosure abatements “extend and [...]

  56. [...] Ritholtz calls for more foreclosures. Indeed I’ve reprinted email where homeowners are desperate to be [...]

  57. cognos says:

    markwax — You also seem to be living in the crisis… 1 yr ago. Do you see the recovery? Looks pretty strong, right? Stocks and risky bonds up 100%… and going higher daily. Leading economic indicators look like a classic strong recovery. Any reason this doesnt continue?

    Jobs always lag. I bet you in 1-yr the whole situation continues to recover (business cycle). My bet is placed in the market. Is yours? (short or cash) Painful.

    Winson Munn — No. Two mistakes in your post. FASB 157 said they HAD to mark-down impaired assets. This is the “mtm” provision. Your description is how it is with FASB 157 SUSPENDED or how it was for the prior 70 years. Your point about tranches and leverage is also all a MTM point. Under your system… in every real-estate downturn and crisis 1990, 1980… every major bank is bankrupt. There is a better way… which is to use accrual accounting in mortgage and project lending (illiquids).

    AAA ABX Tranches – Low price ~1yr ago / High price recently

    Vintage 06-01 = 62 / 85
    Vintage 06-02 = 29 / 49
    Vintage 07-01 = 23 / 37
    Vintage 07-02 = 22/ 38

    So every single one of those is UP. And generally they are up 30-50% in the last year. Keep in mind these represent the AAA tranche which is the bottom 70% of the pool and then this represent the “first-loss” 5 or 10% piece of that 70% AAA section. Its not the whole AAA. (They didnt think that was relevant when they created it).

    The major source of price writedown… and we can see that in the 30-50% recovery is just the new “price of risk” post crisis. It is NOT realized losses and default. Those continue to be subdued and come in better than expect. Colleagues who follow this stuff close will say — “sure, it recovers 80+… probably 100 when it ALL works out in the end. but since you can make 15-20% returns on plenty of other risky stuff… then it should be priced for that.” This was the short rationale 2-yrs ago.

    So 1-yr from now… in a continued recovery… these

  58. Mannwich says:

    @cognos: So part of your justification for a “recovery” is the market going up every day? What about ’00 and ’07 before the bottom fell out? Markets were going up every day then too, until the didn’t.

  59. Winston Munn says:

    A big factor in the meltdown in the MBS markets was the assumption that no correlation existed among mortgages, that the mortgages that comprised the tranches would react as historically predicted although the loan basis for the mortgages had changed from historical norms. At its heart the collapse looks more like chaos theory at work in that small changes to loan qulalifications completely altered the outcome of all similar loans.

    A simplified example:

    If you have two unrelated $100 mortgages that each has an equal but seperate 80% chance of default then you can price tranches on the two mortgages as Senior: $96 and Junior: $64, according to the chance of default (Senior=chances of none defaulting plus the chance of one defaulting without the other, Junior=one defaulting but not the other. Total Loss=4% chance both default.) ; however, what if you change the loan guidelines so that the correlation for the mortgages is not separate but is 100%, i.e., if one of these actions occurs the other will also occur? The you change the values to 80% chance of default for both, 0% for one, and 20% for both.

    This causes a risk re-pricing. Both the Senior and Junior tranches are worth the same, or 80. The Senior tranche gets crushed, collapsing from a value of $96 dollars to $80, while the junior tranche gains from $64 to $80.

    It was not the securitizations that caused the mess – it was the sand-like assumptions upon which the house of cards was built.

  60. Mysticdog says:

    Barry, you keep going back and forth on this. Why on earth would you want to put so many people into the economic penalty box of foreclosure and/or bankruptcy? You know the problem isn’t that people aren’t in houses they can’t afford, its that they are in houses that are over priced.

    So what is better? Foreclosing on people so that housing prices are dropped 30%, which those foreclosed people could afford if their credit hadn’t been wrecked? Or cramming down the principle 30% so the houses are valued “properly” and these people aren’t screwed?

    Just having that many people with foreclosure on their credit sheets is going to knock a lot of elegible buyers out of the market and artificially lower home prices even further than they ought to be.

  61. Agree that foreclosures should be let to happen. The problem is that too many CEO and politicians will lose their jobs if that happened. The government is being “PRO-ACTIVE” to avoid this problem. The public believes that they are there to protect us, and how horrible is it to see family lose their homes? So there they go announcing program after program. HAMP I believe approved only 31,000 out of about 400,000 applications. HAFA may do a bit better, encouraging short sales. The issue is that non-compliance on any of these programs is usually a slap on the wrist, if any.

  62. Winston Munn says:


    Thank you for providing the data. It is as I would expect. The low figures appear to be the result of the overreaction when the markets nearly froze and current prices show repricing based on that overcorrection, but with no real optimism.

    If you were agile enough to buy at the absolute low and hold until today, you are Houdini; however, I would venture to say – even without the benefit of Karnak’s wisdom – that purchases of these assets today could not be sold a year from now with a similar profit.

  63. cognos says:

    Winston Munn –

    Yes. Bets on housing and mortgage finance made in 2005-07… will probably show some losses. (Duh!)

    Remember the classic subprime mortgage portfolio would be made up of 10-yrs worth of vintages. Notice how 06-01 pool is priced at 85. Imagine that of 2005 pools are 90+ and 2004 pools just paid 7-8% interest with zero losses.

    Similarly… today is probably a great time to be building an ABS / levered lending business. Just like the 1992 to 2008 cycle… many billionaires will be made. Key is — taking innovative risk when everybody else is afraid. Isnt is always?

  64. cognos says:

    Mannwich —

    1) Business cycle. In 2006/07 and in 2000 we had a tightening Fed into a 5-10 year recovery/boom. In both cases we had speculative bubbles and excess risk taking (that’s the “top” not yr 1 of recovery).

    2) Where is the speculative excess today? I dont see it anywhere. I see fear, overly cautious businesses and portfolios. I see a nature self-reinforcing recovery. Classic – 1983, 1995, 2003.

  65. jimbonita says:

    On the subject of bank solvency, we should note the action of the FDIC. If you watch the FDIC bank closure listings on Fridays, and read the press releases, you will find that the FDIC generally expects to lose 25% to 40% on the assets of the banks that are being closed. Now that implies to me that the assets (loans, REOs, and ?) are being carried at severely inflated values.

    The inability of the bank’s capital to survive a liquidation of these overvalued assets is the basis of their insolvency. Now if you look at the list of troubled banks on Calculated Risk, you find that there are many out there just waiting to fail. The list of troubled banks followed by the FDIC is even larger.

    We’re just in the early innings of the problem bank game. Sure, there are many banks that are healthy but there are a lot that are in deep trouble. How many banks could survive a 10% hit on their assets? Yet, we’re just getting around to those who can’t stand a 25% hit on their assets.

  66. [...] programs are really all about propping up insolvent banking institutions,” Barry Ritholtz writes. “These programs are another losing round of helping Wall Street at the expense of Main [...]

  67. cognos says:

    jimbonita –

    That analysis of the bank data is severely wanting. The FDIC has not “estimated” a $1B loss on a single bank this year. Fully 19 of the 37 banks they have closed so far in 2010 have “estimated” losses of <$100M.

    Basically… the FDIC will continue to work with small banks to close and consolidate the weaker players and ones who were more concentrated in problematic developments. Often this is just a virture of concentration in time for newer smaller banks that were "ramping" in 2005, 06, 07. Right?

    Also, remember than when the FDIC wants to close / consolidate a weak bank… it needs to provide "upside" to the buyer of those assets. So if the FDIC is estimating losses of 30%… I would say "fair" might be that that bank was "insolvent" by 10%… and then 20% is the frictional costs of transfer. I think in 1-yr buying distressed assets from the FDIC will turn out to be a good trade. Some private equity groups are working to put together funds to do exactly this.

    This is a natural part of the recovery process.

  68. [...] don’t know what I could possibly add to this excellent essay by Barry Ritholz at the Big Picture. An excerpt: I have been dismayed about the latest actions out of Washington and Wall Street. The [...]


    There was a time when the pen was mightier than the sword. That was a time when people believed in truth and regarded truth as an independent power and not as an auxiliary for government, class, race, ideological, personal, or financial interest.

    Today Americans are ruled by propaganda. Americans have little regard for truth, little access to it, and little ability to recognize it.

    Truth is an unwelcome entity. It is disturbing. It is off limits. Those who speak it run the risk of being branded “anti-American,” “anti-semite” or “conspiracy theorist.”

    Truth is an inconvenience for government and for the interest groups whose campaign contributions control government.

    Truth is an inconvenience for prosecutors who want convictions, not the discovery of innocence or guilt.

    Truth is inconvenient for ideologues.

    Today many whose goal once was the discovery of truth are now paid handsomely to hide it. “Free market economists” are paid to sell offshoring to the American people. High-productivity, high value-added American jobs are denigrated as dirty, old industrial jobs. Relics from long ago, we are best shed of them…”

  70. The Curmudgeon says:

    “As in “the only way I can possibly remodel my house is to tear it down to the foundation and build it up from scratch”? ”

    No. As in, if your foundation is crumbling (in this instance, the income and employment opportunities in the American economy for the people that need houses), then you need to do more than tear the real estate market down to its foundation. You need to remove the crumbling foundation and rebuild it first. Then and only then will it be able to support whatever structure you wish to build. So long as Americans lose the international competitiveness race, anything done to “remodel” the residential housing market will ultimately fail. Propping the market up by creating and infusing money can only go so far, and in the end, will yield a still teetering market, and strained-to-the-breaking-point money.

  71. daniel k says:

    Really appreciate this post…as well as the other 13000. What better hobby than something you are great at. Very helpful and educational for the rest of us. I didn’t understand this modification thing. I still would like it if you could explain this a bit more slowly. Just how does it work?

  72. Mr.E. says:

    Br: Looks like you’ll be getting more foreclosures.


    As one maven said so simply to me months ago, “bad debt just needs to default, it needs to go to debt heaven”.

  73. DeDude says:

    Jimbonita; you are absolutely right. Calculated risk gives the FDIC statements of all of these bank liquidations. It is amazing how they often state assets to be in excess of deposits, yet have a huge loss to the FDIC.

    From the last one: Appalachian Community Bank had approximately $1.01 billion in total assets and $917.6 million in total deposits. The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $419.3 million.

    How can the “assets” be over 80 million more than the deposits, yet FDIC lose 419 million? Obviously these “assets” were not worth anything near the stated value. Unless the economy is still severely distressed and assets end up selling at fire-sale prices (and cognos had disproved that idea), then the banks obviously are grossly overstating the true value of their assets. True assets of most banks are probably 30% less than they state. That will not make all of them insolvent, but take the rose colored glasses of many a nose.

  74. Casual Onlooker says:

    @Mysticdog said:

    [...]Barry, you keep going back and forth on this. Why on earth would you want to put so many people into the economic penalty box of foreclosure and/or bankruptcy? You know the problem isn’t that people aren’t in houses they can’t afford, its that they are in houses that are over priced.[…}

    You have a point, but here a another look at it. A distinction should be made between people that can’t afford their houses and will probably lose them eventually no matter what, and people that can afford their payments, yet are stuck in a position where the house is overvalued and they are stuck with the consequences of that situation.

    Folks that are at the brink of foreclosure do not have the money to maintain their property. Over time this begins to show in the neighbourhood. There is also the problem of uncertainty placing downward pressure on home values. Right now everyone is looking for bargain basement deals. If I were to look into a crystal ball, I would venture a guess (at least in my neighbourhood) that there is a reverse housing bubble, and once the inventory of foreclosed houses is reached, then prices will correct somewhat. (I have zero belief that they will get into the ridiculous values at the peak though.)

    People who can’t afford what they got will eventually be replaced by people who can. Delay tactics by the bank in the long run do not help those people. All they do is kick the can down the road. It would be better for those unfortunate enough to be in a situation where they can’t pay, to take their lumps, and move on, without the burden of living above their means. Hopefully wiser afterwards, and in a more stable position. Uncertainty sucks.

  75. philipat says:

    One is again reminded of Churchill, although Obama might not be keen to hear this:

    “America will always do the right thing, but only after exhausting all other options.”

  76. Deborah says:

    cognos, what does the stock price have to do with solvency?

  77. cognos says:

    Deborah –

    Stock price has EVERYTHING to do with solvency.

    1. Obviously if the stock price is material and has moved up 50%, 100%, 200%… the REST of the market does not think the bank is insolvent. Both analysts AND the big money players must think there are significant positive long-term earnings. They are placing large amounts of money on there bet. While this is not perfect… it is probably better than 99.9% of comments on blogs. Earnings expectation drive stock prices.

    2. Higher stock prices make it easier to cover any short-term losses through raising equity. Say a bank WAS insolvent… and worth -10B. But say it has $10B/yr in earnings IF it can stay in business. This “insolvency” is only a timing issue… right? If it can be allowed to earn out of the deficit… clearly this company will soon be worth $100B (10x earnings). If the stock price is very low, say worth only $10B in market cap… it is a harder choice to raise equity cash to cover the basic insolvency shortfall (-10B$). If the stock price is higher… $80B… this is a MUCH easier choice for mgmt.

    Point #2 was the WHOLE point of TARP. Which is that all the banks might (again, might!) have been insolvent… but it was just a timing issue. In local “this quarter” sense… they might (again, might!) have been insolvent… but IF they could make it through they had long-term earnings stream that SWAMPED the small insolvency. (Turns out banking is very profitable in the long-term, huh?). So TARP insured they would not die in the short-term… and now the stock have moved up 200-400% from the lows.

    I bet they move up another 200-400% over the next few years.

  78. [...] Ritholtz at the Big Picture and Rortybomb’s Mike Konczal, are erring towards the foreclosure side. The argument being [...]

  79. DeDude says:

    “While this is not perfect… it is probably better than 99.9% of comments on blogs.”

    Recent history would suggest that the blogs got things a lot more right than the big investors and iBanks. If the market (investors) were so good at finding the right price there would never be big fluctuations in stock prices. But I agree that extend and pretend does save some institutions that just need a little time to get over a crisis. Question is how long we call it a crisis and how much we should invest in extending. With regards to the subject here, I think we should help homeowers not banks. The banks had the expertise to know what they were getting into but allowed their greed to override the risk. Most of the homeowners had no clue that they were taking any risk (and thought that the professionals they payed to help them would make sure everything was good).

  80. cognos says:

    Dedude –

    I think you are confused by the “broken clock” phenomenon. The “pessimist called recession” is not interesting — as research or an investing call. Guys like Roubini, Faber, etc… have been bearish since 1995. A certain crowd (Austrians?) has been worried sick about the debt and long gold since 1985. How’s that working?

    Pessimists had their day in late 2008, early 2009. How they looking now?

    I keep saying it, and its frustrating but obvious — missing the recovery has been a BIGGER miss than being long in 2007 – already! And its getting worse…

  81. DeDude says:

    I would not suggest that all the blogs are great and all the analysts and big money players are terrible. I am just questioning your contention that analysts and big money players are “probably better than 99.9% of comments on blogs”. I have seen no facts supporting that statement, and it flies directly in the face of what I personally have observed. The fact is that both of these two groups have a majority of “broken clocks”. And whether you are a clock broken on 3 or on 9 you are still not right that often. The only ones that seem to be “right” a lot, are those who use fuzzy language and manage to claim, at the same time, that things are good and bad. They can always go back and selectively point to how “right” they were ;-)

    I should point out that taking the ride with stocks from 2007 to now would have been a worse decision than going all cash in 2007 and staying there until now. So yes a lot of perma-bears who did not want to jump back in march 2010 (with our host) missed a win, but they did not lose as much as those perma-bulls who could not get themselves out. Whether going all cash or all stock at this time will be a good idea in a year remains to be seen. I am 30% cash, 20% bonds and the rest in stock.

  82. [...] light of our discussion yesterday (More Foreclosures, Please), Jim Fickett of ClearOnMoney sends us these [...]

  83. [...] Ritholtz says America needs more, not fewer, foreclosures. “The mortgage mods and foreclosure abatement programs are really all about propping up [...]

  84. [...] For more on the f’closures thought process – have a read of Barry Ritholtz guy – decent, well respected independent thinking who wrote on the topic of f’closures just yest: More Foreclosures, Please . . . [...]

  85. underwater says:

    How banks should handle the prudent, but underwater borrower:

    • Allow 100% of payments to be applied to principal until the borrower is no longer under water
    •Rate would reset to the contractual rate at the point where the borrower is no longer under water
    •The lender would be allowed to deduct the forgiven interest as an expense
    •Borrower would pay tax on the forgiven interest

  86. DuchessGateau says:

    Many under-water homeowners WILL eventually lose their homes, and subsidizing them just delays that outcome and gives banks more profit before the day they seize the house. Better to help homeowners on their way to affordable housing. Better to spend the money making that process easier, and less painful. That is the conversation we SHOULD be having, since many are losing their homes. Extend and pretend is harming the rest of the economy, which will not be getting any bailout. BR is exactly right when he identifies our bailout policies as being designed to benefit the banks, not homeowners, so we will spend much more on it, even though we know in advance that it will fail most homeowners. Bailing out Fannie and Freddie was another giveaway to the banks, and any benefit to homeowners a side-effect. It is not in a homeowner’s long-term interest to continue to pour their life savings, retirement, and money borrowed from parents into something which they will lose in the end. It is best to halt their losses now. Renting is not the end of the world. Just ask a renter if we need to give more money to banks and homeowners…

  87. studioroom says:

    Thank you very much for writing this and speaking out on NPR today. I have been *trying* to buy a house for my entire adult life. The problem with the real estate market as I see it is that house prices were/are overpriced to begin with. But people bought those overvalued “investments” without thinking. It’s delusional to assume prices need to “recover”… recover from what? Speculation? It’s not fair for everybody to have to support a false market.

    And how is it fair to consumers and prospective buyers to hold foreclosures off the market? How is that good for communities or the tax base in local areas?

    I would like to see actual consequences for bad decision making. Nobody put a gun to anybody’s head and forced them to buy a house. Now, it breaks my heart that cash laden vultures will swoop in and pee all over the American dream, turning homes into rentals. We are heading into feudalism! I don’t understand why there can’t be some controls to ensure that homes remain homes first and investments second.

  88. Sacrifice says:

    But Barry in order to sell this politically
    you have to explain how you can either:

    1) buy votes
    2) give something for nothing to the ‘undeserving poor’

    with more foreclosures…
    That will get the politicians and
    benighted upside down slobs onboard.

  89. Nelson says:

    I had no idea who you were or that this blog existed before I heard you on NPR today. I listened to you and thought to myself, “Finally, someone who understands what’s going on and isn’t afraid to say it.” Good job and Thank you.

  90. vaughn says:

    well, of course what Barry’s written here is absolutely correct.
    You have to have a list of ridiculous talking points laid out in front of you to even begin to refute it.

    “the poor homeowners”…I want to KILL the poor homeowners (i RENT) almost as lustily as i want to hang the bankers, insurance company execs, pharma chiefs, military contractors, televangelists, rappers and politicians of amerika.

    as to, “I’m sure unscrupulous characters will find a good reason to default and get a better deal even though they can make the payments.” i give you, “in a time of universal fraud, behaving in an ethical manner is an act of stupidity”.
    welcome to the United States of Moral Hazard.

  91. [...] lending institution.Barry also wrote some additional thoughts on this issue on his site last week: More Foreclosures, Please…It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) is [...]

  92. [...] Ritholtz writes in More Foreclosures, Please…: It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) [...]

  93. CoastHomebuyers says:

    This is a great post, and I absolutely agree. It’s insane to attempt to prop up home prices at unaffordable levels. All you end up doing when you try is throwing tons of money at it just to have prices correct in the end anyway. It’s futile to attempt to thwart the market; it always wins in the end. The best solution for the current mess is to just get out of the way and let the crash happen. The depression is always the cure for the excesses of the previous boom, so we need to let the depression take its course and clean out the malinvestment. Once that happens, the economy will regain its footing and start growing again. The longer we attempt put off the needed correction, the longer we’ll suffer in an anemic economy.

  94. [...] is an interesting development that fits into nicely into our recent discussion that foreclosures are a net positive to the economy.The return of the flipper, foreclosure edition. [...]

  95. [...] this is coming from me, the guy who advocated that the economy needs more foreclosures . . [...]