Every spring right around March, I start hearing all the alarms, all the warning bells, and all the Doom Sayers crying, “The Foreclosures Are Coming, The Foreclosures Are Coming!!!” They go on to alert the public that the banks are getting ready to unload a massive amount of foreclosures on the market. As a result, home prices are going to fall, the market is going to be flooded, and the economy will be depressed. Every year for the last four years, I have heard this same narrative and every year, IT HAS NOT HAPPENED. Why?
All anyone needs to do to understand why this has not happened and why it is not going to happen is study up on banking and balance sheets. You see, banks are healthy right now (plenty of cash) and so are their balance sheets. The balance sheets are important to the banks’ shareholders and investors. Let’s say that the bank has a lot of foreclosed properties on their balance sheet, priced at “X.” Chances are, when the bank releases those homes on the market, they are not going to sell at “X”; they’ll sell considerably cheaper at “Y.” Once that happens, the bank will need to maintain the balance sheet by writing down the loss. Now, the bank can do this without upsetting too much of the balance sheet and investors if they do it a little at a time. What they can’t do is dump 100, 200, or 300 million dollars of property on the market at one time and then write down that loss in one lump sum. That would upset investors, shareholders, and the balance sheet. Instead, what banks do is slowly release a few foreclosures at a time into the marketplace and then write down those losses, never really turning the balance sheet upside down. This is exactly the formula that they have followed for the last four years.
One bank executive told me that he is under enormous pressure from the public to release his foreclosures to the marketplace, but will not do so for the reasons I mentioned above. So the next time you hear people sounding the alarms that the “foreclosures are coming,” don’t believe them. They haven’t for the last four years and they are not likely to do so in the near future. As long as the banks are flush with cash, I would expect the process to remain the same.
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