The Housingstorm blog had an interesting take on why the banks are reluctant to foreclose on delinquent borrowers.  But before going into housingstorm’s take, consider the case of Mr Microsoft, whose own foreclosure case (or lack thereof) was depicted in this article.  The value of Mr. Microsoft’s condo, according to recent listing and sales data, has declined by over 40 percent.  Mr Microsoft has not made a mortgage payment for almost a year, and although the bank initiates contact with him regularly, they have yet to foreclose on his severely underwater mortgage.  Why are banks not foreclosing?


According to the housingstorm article,

Banks don’t care about home prices. They care about not losing money. Because the government changed mark-to-market accounting rules, the link between low prices and losing money is broken.

Banks make more money by NOT foreclosing on homes. Banks are dragging out the foreclosure process for their own selfish reasons. Until the day they foreclose, the amount of money owed to them is an asset…sure, it’s an asset that isn’t paying interest payments…but it is still an asset. The day they foreclose, a $400,000 asset could become a $150,000 asset and a $250,000 loss.

Multiply that loss by 10, 20, or even 30 times leverage and there are several million dollars worth of new loans that the bank can’t make.

Faulty government programs and doctored accounting rules have produced the fiasco before us: There are roughly 4 million homes that should be foreclosed on but they won’t be any time soon. This enormous can is continuing to get kicked down the road.

Economists are predicting a recovery. They say that our various programs are making an impact. In reality, all they’ve done is kick our can of reckoning a little further down the road.

With so much shadow inventory being held back from the market, can any sane person possibly think this is a good time to buy a home?