With the federal government appropriating over a trillion dollars to spending and stimulus programs and the Federal Reserve private bank system pumping into the markets close to $10 trillion in liquidity, can there really be a liquidity crisis anymore? And if so, how many more trillions of dollars of liquidity will be needed to solve the problem?
It should be obvious by now to anyone paying attention that the markets are not in need of more liquidity. Through the initial $300 billion Troubled Assets Relief Program (TARP), the US Treasury invested in banks and bought special types of preferred stock. In response, the banks receiving TARP money essentially stuffed it in the mattress.
The real problem is that the value of many of the assets that once backed up the debt obligations held by these banks have fallen so dramatically. This was bound to happen when the banks started taking advantage of the Federal Reserve's artificially low interest rates to start making loans to people who would never be able to pay them back.
Values were inflated by everyone involved in the real estate transaction and all the players went along with the bubble psychology. Borrowers wanted to get in on a bubble economy and were willing to finance 100% of the purchase price, knowing they could just sell in a year or two and make a large amount of money.
Real estate agents knew that the value of the property and its sales price would determine their commission.
Mortgage brokers knew that their pay (through commissions, fees, yield spread interest) would be based on the loan amount.
Appraisers knew that if they failed to appraise a property for the maximum marginally-plausible amount, they would get no further business from banks or mortgage brokers.
Banks knew that the larger the mortgage, the more the debt security would be worth. And they also knew that, if the owners fell behind on their loan they could just refinance or sell and take their gains. And even if they did not sell, the bank could foreclose and sell it later on and take the profits of the inflating bubble for themselves.
When delinquencies began to rise and values started to fall, the dodgy debts became totally worthless. People who can not pay a mortgage on a property with an inflated value can sell. People who can not pay a mortgage on a property that is underwater are forced into foreclosure unless they can work with their lender.
Values have fallen in real estate, but sellers can not list their properties for sale when the mortgage is 150% of the current market value of the home. If they want to try to sell to prevent foreclosure at all, they need to sell for a high enough price to pay off the mortgage company. And no one is buying at those prices anymore.
They need a short sale to be approved by the mortgage company in order to sell for a reasonable price. But the banks are notoriously difficult to work with negotiating for short sales. If they ever acknowledge receiving the offer at all, it is too often denied.
Then, a few months later, the bank forecloses and lists the property on the market for even less than the original short sale offer. The homeowners were not permitted to sell for a higher price to prevent foreclosure than the banks sometimes list the properties for after they take them back!
Currently, the banks are shooting themselves, homeowners, and home buyers in the foot in not accepting that real estate values have fallen. But the banks also have very little incentive to acknowledge falling home prices.
First, if home values were accepted to be lower than they were in 2006, this would instantly discount the value of the mortgage securities. Many banks that invested heavily in CDOs, MBSs, ABSs, and the rest would have to face that they are already insolvent.
Secondly, banks are doing just fine in receiving money from the feds to continue operations without having to acknowledge any of the mistakes of the past. Congressional tongue-lashings have been the worst most banks have had to undergo, and their reward for such public spectacles is usually billions, if not tens or hundreds of billions, of dollars.
Finally, the government has stepped in to make it easier for banks to hide their losses on mortgage securities by pressuring the accounting standards board to relax valuation rules. This makes it easier for the banks to keep inflated values of mortgage assets on the books while their borrowers have to deal with actual decreasing property prices in the real world.
So a bank is able to keep a mortgage on its books valued higher than any rational buyer would ever pay for a particular home. The homeowners are facing foreclosure and would just like to sell for the current value and put the entire experience behind them.
But the banks and the government have facilitated a business environment where it is a better deal for the banks to avoid recognizing falling home values and simply turn down short sales. Homeowners are forced to try to sell for what they know to be unreasonable prices.
Thus, the government allows housing prices to be kept artificially high and gives banks incentives not to work with borrowers to sell properties. As a result, defaults increase, the banks declare the problem to be bad borrowers and "liquidity," and come begging to the government. The government hands them more money and gives them more advantages to prop up housing prices.
Author Resource:-
Nick writes daily articles specializing in how you can save your home from foreclosure while there is still time left before a sheriff sale or eviction. Learn to defend the bank's attempts to take your home, find a reputable attorney, delay a trustee sale or eviction, qualify for a foreclosure loan program, and put together a reasonable alternative that will let you keep your property from being sold out from under your feet. Visit his site to read more about your options to avoid the loss of a house and understand more about how and why the real estate market has been collapsing for several years now: http://www.yousaveforeclosure.com/
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