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Wednesday, December 14, 2005

Are Banks Reluctant To Foreclose?

This article on slate.com puts forth the notion that banks are afraid to foreclosure on delinquent homeowners. The author makes the argument that foreclosures cause a hit to the bank's balance sheet and create bad PR, so banks would rather let mortgagees miss more and more payments than take their houses back. Lower foreclosures also helps keep the bank's stock price high.

I'm not sure I agree with this. As the author states, in Louisiana and other hurricane-damaged areas, it does seem to make sense not to foreclose. But everywhere else? I can't see it. Banks balance sheets contain entries for non-performing and under-performing loans, so the balance sheet still takes a hit. (And this is not even considering the lack of income non-payment of loans causes the bank, which also shows up on the balance sheets.) If investors see lots of underperforming loans on the books, I think questions are going to be raised about the bank's business practices: Why is the bank lending to deadbeats? Why is the bank continuing to lose money on these loans rather than cut their losses? Now, I do think banks have a bit of wiggle room here. Because of the hurricanes, they can claim higher than normal amounts of non-performing loans and get away with it, which allows them to hold off on foreclosures across the nation and not just in disaster areas, since they most likely aren't going to break out the loans by state in the financial reports. But this is a temporary reprieve and dragging it out will only delay the inevitable. Indeed, it will make it worse as each month that goes by without a payment is that much more money the bank has lost.

It also appears that current data does not support the author's conclusions. The article is based on data up to the second quarter of 2005 - data that is several months old. As I mentioned before, foreclosures have actually increased nationwide in the last couple of months. (And interestingly, that article attributes part of the rise to increases in foreclosures in hurricane disaster areas - exactly the opposite of what the Slate article predicts.)

4 comments:

Seattle Eric said...

Shaun:

Can you link to the slate article you reference?

Eric

Shaun said...

The first word of this article is the link :-)

OC Real Estate Editor said...

Great info on foreclosures!

Shaun said...

Thanks! OC, huh? I grew up in Fullerton! One of the reasons I left Southern California was I knew I could probably never afford to buy a house there.

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