Monday, April 28, 2008

Gotta Know When to Hold 'Em had an interesting post today regarding the reluctance of banks to get homes off their books despite rapidly depreciating values. Doesn't seem worth it to bleed carrying costs and diminished value each month.

It's to the point where if I see a listing that's a short sale or bank-owned, I won't so much as give it a second thought. I mean, what's the point? Sit around for weeks and wait for an overwhelmed, overworked bank rep to finally return your call only to reject your fair-market offer?

Hell, by that time the median home price will have lopped off another 1 to 2%.

Anyhow, Patrick provides an explanation that makes sense to me.

One answer is that if the banks were to really sell their foreclosures for what they’re worth in the open market, that would devalue the collateral they hold on all their other mortgages, rendering the banks instantly insolvent.

That pretty much nails it, no? Because of the likelihood a bank would have multiple mortgages in the same neighborhood--and quite possibly on the same street--it's in their best interest to ensure the comps aren't any lower than they need to be.

However, all it takes is one lender that's less confident about the prospects of a federal bailout to jump the gun, dump a property for market value--or below it--to cause a chain reaction.

Go read the link and the corresponding comments. Come back and let me know what you think. I'm curious about your thoughts.


  1. I think that explanation give too much credit to the banks. They don't have that much forethought (at least at the local level).

    RandyH's explanation, that they are simply not competent (in terms of staff and decision making authority) to handle the volume of REOs seems more plausible to me.


  2. FreedomCM

    You're right--it does give too much credit to the banks. After all, they certainly haven't demonstrated a high degree of fiduciary sophistication during the last few years...why would they start now?

    The more I've thought about it, I realized Patrick's answer operates under the assumption that the banks actually carry a significant portion of their rotten loans on their books. As we all know by now, part of the reason lending guidelines got sloppier than a Pi Phi on Kamikaze Night was because banks didn't have to carry the toilet paper on their books.

    I read RandyH's comment and I agree that it's impossible to ignore the bottle-necking effect of plain ol' understaffing and unpreparedness. I get that.

    However, I have to believe that the banks, as poor as their track record was in the recent past, have SOMEONE behind the wheel with a modicum of financial savvy, capable of seeing the big picture. Especially at this stage in the downturn.

    Honestly, I HAVE to believe that. Otherwise, if they truly are that incompetent, there are some CDs and checking accounts I need to close tomorrow--FDIC insured or not.

    Thanks for commenting. I have some interesting/hilarious properties coming up and I'd love to get your 2 cents.