New wave of foreclosures coming- Worse than first wave??!!

[Rich Weese]

I've not been bullish on the market for sfrs lately as many of my posts have stated. I continue to be cautious. When everyone is jumping on any bandwagon, the wagon may overload and break down.
If you're buying STRICTLY for existing cash flow, I think it is still ok. Buying to flip or short term is foolish, imo. Here is ANOTHER article backing up my concerns.

http://www.msnbc.msn.com/id/35832152/ns/business-washington_post/page/2/

Here is the reason this really worries me. There is a feeding frenzy, auction scenario in many areas like FL, Vegas, Phoenix and others. Prices are being bid up with NO logical reason.(does that sound familiar to previous times?) The first wave of foreclosures was primarily due to the subprime loan mess. There are now millions MORE homes in jeopardy with more problems to come. As article explains, it normally takes 6-7 months of missed payments before lenders start foreclosure. Millions of homes are falling into that area now. Lenders are still not lending, which means purchases must be for cash.
It is also obvious that many lenders have been delaying foreclosures and then delaying resale of these REOs. These HAVE to hit the market sometime! There are numerous reasons why lenders are witholding properties , but imo, one is front and center.
If the lender shows on their balance sheet a note/mortgage, it shows as an asset of full value. When they repo and sell this asset for 50% of loan, the balance sheet drops by 50% on that asset, even though the 50% is cash. When they do this too much, too fast, their balance sheet drops considerably and then they risk not being able to pass the govt stress test required for banks! They may even face closure by the fed govt. if their "health" looks bad. That is why their reos are trickling into marketplace.
If we have round 2 of foreclosures, no one knows what this will do to the fragile RE rebound currently manifesting itself. Never before did we have a subprime meltdown. No one was ready for it nor knew what the results would be. I also don't believe anyone knows what will happen with this coming round 2, which is the GOOD prime loans!

Here is a top ten to address:

1. will banks loan?
2 will banks take the losses on balance sheets and release more reo's?
3.will investors still buy?
4.will investors still have cash?
5. will prices/rents continue to drop?
6.will tenants still have jobs and money to pay rents?
7.will govt create more "giveaway" programs to "fix" mess?
8.will these new programs create a false temp value of homes?
9.will these homeowners being bailed out be a temp fix?
10.will the weight of new giveaways be the last straw that crushes our economy and status in the world and start the dominos falling?

I think 10 is enough! I'll continue to voice my reasons for concern. All is not well, yet, and may get even worse. I know that no one wants to think that, but your livlihood could depend on decisions and choices you make now, imo. Tortoise and the hare----Right now, the tortoise method seems better, imo. Rich.

[Ralph S.]

Rich
I'm only responding as you and J have earned, IMO, a well earned and highly respected reputation here on BP, but you've missed on the accounting points the FinanceExaminer brings up.

It is not something called "Bank Accounting" that rules the day. It is GAAP (Generally Accepted Accounting Principals), and accrual accounting, that banks and all publicly owned and government regulated businesses must adhear to.

GAAP requires that when an asset becomes impared, such as when collection of receivables, or the value of an asset comes into doubt, a reserve must be established and the financial impact be recognized at that time. This would be before any foreclosure or collection efforts occur.

To accept your points that the financial impact occurs when the REO is sold, would be considered fraud on the part of the financial institution for having overstated the value of their assets prior to that time.

The missing part in your statement:

Is that when the $100K note is written off, and $50K is received in cash, the reserve is reduced by $50K. Since all of these are assets, and the two 50's offset the 100, there is no change in assets when it is sold. If there were a difference, such as when the reserve was estimated too high or two low, that difference would land on the income statement, not the balance sheet, and still, assets remain unchanged. Since you reduce the reserve (and eliminate the "troubled asset"), the % should remain roughly the same.

While the in depth debits and credits applied by the banks when loans go bad are out of my experience, the concepts of accrual accounting, reserves and GAAP are not, and are not hard to understand. They are all designed to make sure every company is measured on an equal basis (GAAP) by following the same rules, and that the financials at any given point in time are as accruate as they can be as to the value of assets, liabilities, equity and income.

When they don't, you get Enron and Bernie Madoff, and perhaps the bank where you sat in their board meeting.

Guess I've been through too many audits, having to defend many of these reserve balances of the companies I've worked for. It's not Banker Boardroom stuff, they have no say in the matter, just nuts and bolts accounting.

Bummer. Guess we'll just have to agree to disagree, since you're done.