Foreclosure Freeze: Better for You or Banks?

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While defaulters living for free may be helping to stimulate the economy with money they can spend on things other than their mortgage payments, most of the rest of us will feel the pain as the foreclosure freeze delays the healing process for the housing market. Yet some think a delay in foreclosures might not be bad for the banks.

In fact columnist, Peter G. Miller, thinks the delay in foreclosures that we've seen so far over the past year or so could have "prevented the financial system appearing significantly worse." He thinks the "national fudging process" of the banks may be able to go on a bit longer as they wait "until property values increase for real."

Right now the banks are carrying many of these foreclosed properties at a higher value than they are worth today. Once they sell them off, they'll have to report the true value of the assets they are holding.

In September 2010 the estimated shadow inventory of delinquent loans, foreclosures and bank-owned properties was 7 million in the U.S., according to Fitch Ratings. Fitch expects the liquidation timelines to continue to increase because of both modification efforts and foreclosure defects. This will result in more severe losses for residential mortgage-backed securities (RMBS), because they will have higher carrying costs and slowed cashflow. Not only are banks affected by the delays but other holders of RMBS securities also will feel the pain, they include pension funds and insurance companies.
People who are waiting to purchase foreclosure properties are finding that they either have to walk away from
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money they spent on getting mortgage approval or, because their closing was delayed, pay for temporary housing until the foreclosure freeze lifts. So while people living for free in foreclosures stimulate the economy, others waiting to buy the homes have less money to spend.

Banks now have to spend money fixing their mess, which will obviously increase the costs of foreclosing on the properties. While that will hit banks' profits, they took the risk that they could get away with a faster, cheaper foreclosure process and lost the bet. They will now have to spend what normally would have been spent to properly prepare foreclosure paperwork and make sure they are not foreclosing on the wrong property or for the wrong amount.

Hopefully, this will put an end to the stories of illegal trash-outs that plague people who bought foreclosures or who found cash to save their homes from foreclosure.

So we're back to the fact that the people at the heart of this mess -- those who can't pay their mortgages and the banks who did not take proper care in making these loans -- seem to get the best of this deal. Banks can continue to hide the losses in their shadow inventory and defaulters can continue to live free, while everyone else will watch the housing recovery stall and house prices drop yet again as the healing is delayed.

Lita Epstein has written more than 25 books including "Reading Financial Reports for Dummies."

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