Foreclosure ‘Mess’ Negatives Are Exaggerated and Positives Are Ignored

Friday, October 15, 2010

Typical of this year’s one-sided analyses, the foreclosure slowdown is being dressed up as a terrible blow to both the real estate market and the banks. Not only are the adverse effects overstated, but also there is little mention of the beneficial effects.

Looking at what’s happening without the hype shows a much less worrisome outcome – even, possibly, a better one than where we were headed before the slowdown.

Where we had been headed

Early in my career, I was warned to watch out for banks because the tended to act like sheep – running pell-mell one way, then turning and taking off in another. The end result was what we call bubbles and busts. History has born out that observation.

Before the foreclosure slowdown, banks were running full speed for the exits. The problem was their timing was bad. They were about to throw a significant supply of non-owner occupied houses “as is” on the real estate market, just as it entered the usual, seasonal slowdown.

Imagine the headlines then.

  • “Supply up by X% (new record)”
  • “Supply represents X days of sales (new record)”
  • “Average price drops again (signaling second dip in housing market and that the bottom hasn’t been hit)”

News reports like that would act as a disincentive program, with would-be buyers thinking twice and probably delaying making a purchase – all because the banks succeeded in dumping their non-performing mortgaged property at the same time. For the banks, their dumping actions would have maximized their losses.

What changed

Think of the legal foreclosure requirements as traffic control lights. Rather than allowing cars to pour onto a highway, ruining the flow for everyone, the entering cars are spaced out. Although that isn’t the purpose of the requirements, it is the desired effect in this unusual time of many foreclosures.

Continuing, think of the banks’ skirting the requirements as an attempt to ignore the lights. But they got caught. Their penalty? A time-out, parked on the shoulder. Their reaction? Whining, accompanied by warnings of damage to the real estate market and to banks’ finances.

Where we are headed now

Those warnings are specious and self-serving. Remember that this isn’t a forced, adverse action. Rather, it’s a bank-caused problem where many (most? all?) banks tried to take shortcuts with the foreclosure process. (The sheep analogy works again.) Now that they’re caught, they have to back up and simply do it the right way.

As discussed above, the result will be beneficial to the real estate market. The additional homes put up for sale will be spaced out rather than dumped, preventing those off-putting headlines. Therefore, the spring selling season pickup will likely happen as usual. Ironically, this means the banks will end up selling their properties quicker and at better prices.

What about those warnings we’re reading about?

The 23 states that require a judge’s signoff unacceptably slow down the process. Yes, the states are split just about half and half between the need for a judge or not in order to foreclose. Florida requires it; California does not. Average closing time is somewhat longer in Florida. The response we should have is, “So?” The banks that rushed into the Florida real estate market knew (make that, should have known) the difference. They cannot now say the laws are draconian. States can determine their residents’ legal protections as they see fit.

The real estate market will be worse off by having this overhanging supply coming instead of being sold off. This “overhang” has been discussed for months, yet the real estate markets in many areas, even those with heavy foreclosures, have shown improvement. Besides – it isn’t potential supply that has the most damaging effect; it’s actual supply being dumped on the market.

The bank’s finances will be seriously hurt. This worry that supposedly hit the market hard yesterday presumes that the dumping would somehow have produced better financial results. As discussed above, the actual results would probably have been worse, not better.

What investment actions could we take?

Two ways to profit from this situation are:

  1. Don’t sell the affected bank stocks. When negatives are overblown, prices temporarily sink too low, then recover as cooler heads and better analysis prevails.
  2. Consider buying those bank stocks. At worst, profit projections will be delayed. At best, the results of the foreclosed home sales will be better than expected. And remember that these banks have much more going on than just this final step of clearing out their nonperforming mortgage properties.

The three biggies are Bank of America (BAC), JP Morgan (JPM) and Wells Fargo (WFC). Notice that through Thursday, October 14, close, recent stock drop has not taken stocks to new lows.

So… View this foreclosure “mess” as just that – a bank-created mess from many/most/all banks running for the exit, and all taking an improper shortcut to try to beat (or keep up with) the other guys. We should have three reactions: (1) satisfaction – that legal protections of homeowners are being enforced; (2) calm – that banks are simply having to back up and process the foreclosures properly; (3) optimism – that the real estate market will see a more orderly foreclosed property selling process AND that banks could actually see improved results.

Tags: , , , ,

Leave a Reply

You must be logged in to post a comment.


John Tobey on Seeking Alpha

Seeking Alpha Certified

October 2010