What Are the Banks Really Doing?

Many thanks to Housing Doom for the post that spawned this comment:

"About one year ago, I read an article that stated the lenders don’t want to sell because that would translate into a loss on paper. However, as long as they hold the property, it is an ASSET! I suspected this a long time ago, even though the press and realtors told me that the banks don’t want to hold the properties….blah, blah, blah. It’s all about perception, not reality. They don’t care it the place falls down, just as long as they look good on paper."

It's an interesting point, and one that seems to make some sense (even though it's evil).

Most of the large mortgage providing banks such as Bank of America, Washington Mutual and Countrywide, Wachovia, Chase, Citigroup and smaller regional banks like National City are insolvent or very close to it because of the multi-billion dollar mortgage writedowns, the explosion of loan-loss reserves on their books and the billions more writedowns to come.

Couple this with the plethora of stories about entire blocks of foreclosed properties not on the market yet and properties where the banks are "sitting" on offers for 3 months or more, and you can see the value of that statement. They need to hold assets on their books and this is an easy way to do it.

But it's not the right thing to do. Not by a long shot. It only adds to the problem. The longer they keep homes on the books, the longer those homes remain vacant. The longer they remain vacant, the higher to probability that the homes fall victim to vandalism, squatting, drug dealing and disrepair. I don't need to tell anyone what that does to the values of the surrounding areas not to mention the bad karma. This also greatly decreases the chance that the home or any of the homes in the area will ever sell, and if they do... for pennies on the dollar. Add to this the 1 million homes that builders are already on pace to build this year (but in 2007 new homes sold at a 600K pace, so they are currently STILL building 40% more new housing than they need), the foreclosures that do hit the market and the existing level of inventory... throw in the credit crunch for good measure and see what happens.

This is frightening, folks. The banks are perfectly willing, if you believe this theory, to perpetuate the spiraling housing market to keep assets on their books to stay solvent. At the same time, they are petitioning the government to take their bad assets. Fed short term borrowing is at record levels and leveraged buyout deals are falling apart due to lack of funding.

Believable? You do the math.