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Thought this might be interesting to those of you who are shorting lenders...
Junior lien holders (i.e. 2nd mortgages) have begun instructing the foreclosure auctioneers to cancel the sale if no one shows up to bid. This strategy avoids their having to show the property as real estate owned on the balance sheet, and avoids their having to pay off or maintain the senior loan which would create cash flow issues. The net effect is that loans that SHOULD be showing as foreclosed in the financials, won't.
Similarly senior lien holders (i.e. 1st mortgages) have begun instructing the foreclosure auctioneers to delay the sale if no ones shows up. In CA they can do this for up to one year. As above, this pushes out the inevitable balance sheet implications.
As I've said here before, I truly believe it is going to take quite some time before the downside of recent lending practices shows up on their financial statements. Here are a couple of other reasons that I've mentioned previously:
1. ARM resets typically don't occur for 1-5 years. In most markets anyone who bought more than 2 years ago still has enough equity to refinance or sell rather than face foreclosure (yet). If they do refinance they'll likely lock in a low payment with a neg am, option arm, that will push the inevitable out another 2-5 years.
2. Foreclosure volumes while increasing are still historically low. The incredible run up in equity, while now declining, has given folks options. Unless you bought with 100% financing (or did some sort of crazy 100%LTV equity line) in the last 18 months, you still likely have enough equity to have options and avoid foreclosure.
3. Foreclosure data, reporting what actually was sold, has at least a 30-60 day lag. And that data provides no clue as to junior liens that were wiped out or other critical data that would be nice to know before it shows up in the 10-Q months later.
Bottom line... I truly believe that it will be quite some time before we realize the full impact of how dismal lending practices have become. If your busy shorting lenders, keep this in mind. While you may win near term on sentiment, and declining earnings due to slowing volume, be careful on timing as the real $&@# may not hit the fan for quite a while.
Junior lien holders (i.e. 2nd mortgages) have begun instructing the foreclosure auctioneers to cancel the sale if no one shows up to bid. This strategy avoids their having to show the property as real estate owned on the balance sheet, and avoids their having to pay off or maintain the senior loan which would create cash flow issues. The net effect is that loans that SHOULD be showing as foreclosed in the financials, won't.
Similarly senior lien holders (i.e. 1st mortgages) have begun instructing the foreclosure auctioneers to delay the sale if no ones shows up. In CA they can do this for up to one year. As above, this pushes out the inevitable balance sheet implications.
As I've said here before, I truly believe it is going to take quite some time before the downside of recent lending practices shows up on their financial statements. Here are a couple of other reasons that I've mentioned previously:
1. ARM resets typically don't occur for 1-5 years. In most markets anyone who bought more than 2 years ago still has enough equity to refinance or sell rather than face foreclosure (yet). If they do refinance they'll likely lock in a low payment with a neg am, option arm, that will push the inevitable out another 2-5 years.
2. Foreclosure volumes while increasing are still historically low. The incredible run up in equity, while now declining, has given folks options. Unless you bought with 100% financing (or did some sort of crazy 100%LTV equity line) in the last 18 months, you still likely have enough equity to have options and avoid foreclosure.
3. Foreclosure data, reporting what actually was sold, has at least a 30-60 day lag. And that data provides no clue as to junior liens that were wiped out or other critical data that would be nice to know before it shows up in the 10-Q months later.
Bottom line... I truly believe that it will be quite some time before we realize the full impact of how dismal lending practices have become. If your busy shorting lenders, keep this in mind. While you may win near term on sentiment, and declining earnings due to slowing volume, be careful on timing as the real $&@# may not hit the fan for quite a while.
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