Foreclosure Freeze: Better for You or Banks?

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.