Bank of America made headlines with its principal forgiveness program. The real news is that they are preparing to blast debtors out of their bunkers of entitlement.
The more I know, the less I understand
All the things I thought I knew, I’m learning again
I’ve been tryin’ to get down
to the heart of the matter
But my will gets weak
and my thoughts seem to scatter
But I think it’s about…forgiveness
Even if, even if you don’t PAY me anymore
Don Henley — The Heart of the Matter
Lenders are trying to figure out how their massive Ponzi Scheme collapsed. They are relearning lending again because everything they thought they knew was wrong. When you get down to the heart of the matter, borrowers are carrying too much debt which is killing them financially and emotionally. It is about forgiveness. Even if it means debtors don’t pay anymore.
Forgiveness never comes easy, and in lending it never comes cheap. These debts will be forgiven, and the toxic loans that spawned them will be cleansed from the system — mostly through foreclosure. Home debtors are hoping for principal forgiveness without consequence. That isn’t going to happen. Lenders only forgive as a last resort, and there are consequences for the borrower. When it’s done, lenders turn to the US taxpayer to make them whole again.
A 600% increase in Foreclosures
I attended a local Building Industry Association conference on Friday 26 March 2010. The west coast manager of real estate owned, Senior Vice President Ken Gaitan, stated that Bank of America, which currently forecloses on 7,500 homes a month nationally, will increase that number to 45,000 homes per month by December of 2010.
After his surprising statement, two questioners from the audience asked questions to verify the numbers.
Bank of America is projecting a 600% increase in its already large number of monthly foreclosures.
This isn’t unsubstantiated rumor; this comes straight from one of the most powerful men in Bank of America’s OREO department (yes, that really is what they call it). It appears they have too many properties already.
Perhaps this is a good time to start a Trustee Sale service…. One of the panelists who works for a building company said he was flipping houses with his personal money. He noted that in some markets, he can buy a house at auction for less money than builders are paying for finished lots. That is a bit crazy.
There was encouraging news from some in the reality-based community at the conference. Builders are buying up projects in Southern California, so the land market has found a bottom. Prices are still speculative, but the builders are buying to have buildable inventory, so in select markets real demand exists for finished lots and properties with partial improvements.
There was a certain amount of positive spin at the event, which is natural given the beleaguered stated of the Southern California building industry. Jeff Collins at the OC Register covered the more bullish opinions.
It is still not enough
Last week I noted that Lenders Start More Foreclosures to Catch Up with Delinquencies. Consider the size of the problem: 1.2 million Bank of America homeowners are in default. Even if they forclosed on 45,000 a month for a full year, that is only 540,000 foreclosures. What about the other 660,000 people in default? I think their number — large as it may seem — is actually wishful thinking. It is worse than that. (thanks jules)
Principal reductions are a public relations diversion
Everyone is abuzz with the news that Bank of America is forgiving principal. As you might imagine, many will apply and few will be helped. Moral hazard dictates that irresponsible borrowing that results in free money will cause more irresponsible borrowing; after all, it isn’t borrowing, it’s a gift. If banks start giving away money, everyone will do whatever is necessary to obtain it.
I contend the principal reduction program is a public relations diversion. Let’s look at the numbers. By Bank of America’s own admission, the program will assist 45,000 customers — a sum equal to the monthly foreclosure rates they are anticipating by the end of the year. If they are foreclosing on more people each month than would be helped by the principal reduction program, then the program is merely a pleasant facade intended to divert attention from the huge volume of foreclosures they will push through.