So what if a few million "little people" people lose their homes...

Why should lenders and servicers raking in current profits worry about the future when the getting is so good right now?

For two years now at unsustainabubble.com I have been trying to understand/reason out why lenders and servicers are not modifying loans through principal reduction. I hypothesized that it was due to special tax loss carry forwards that made foreclosures with 50% loss severities OK, since the institutions would be paying reduced or no taxes on inflated and artificially induced profits from bailouts, borrowing at 0% interest etc.

The "Re-Default Risk" entry on the Blog "Credit Slips"  (www.creditslips.org ) and a really good article about "How to Stop Foreclosures" from Bank-o-Meter (www.bank-o-meter.com) have shined a major light on what may well be the key incentives for lenders/servicers forcing 80-90% of NOD's into foreclosure in CA, rather than trying to truly work out the loans. These reasons have to do with the ability of lenders and servicers to collect far more on defaults through "Credit Default Swaps" than the current loan balances and to collect high accumulated penalties and fees on defaults "off the top" from foreclosure recovery sales. If I were a greedy lender, looking for ways to enhance my profits with little or no risk to myself, I might do the same. So what if a few million homeowners have their lives altered (perhaps forever) as a consequence.

I would love to see a volume breakdown of portfolio loans compared to MBS type securitized loans. If as I suspect, the bulk of bubble era loans are securitized and the servicer who moves slowly to foreclosure can collect fees and penalties off the top from a foreclosure sale plus collect a huge CDS payout (probably funded now or eventually to be funded  by "resource transfers" from present and future taxpayers as in the case of AIG) not much will change in the downward bubble area price spiral except for higher taxes to fund resource transfers,higher insurance premiums to fund losses incurred by all mortgage insurers, etc.

The ability of large institutions to get fees from Home Affordable and book them as current revenue may also be a disincentive for more rational loan work outs that include principal reductions. Plus the fact that GSE refis of weak portfolioed loans moves the risk from the private sector to the public sector (another form of bailout for portfolio lenders).

Despite record foreclosures, lenders and servicers are releasing only a fraction of their actual inventory to the marketplace, presumably to perpetuate an environment of multiple offers and maximize current recoveries. Flooding the market would result in much lower values, and if the lender has collected or will collect CDS "insurance" money, they have no pressing need to release the inventory despite carrying costs. Does anyone else think this is the case? The number of homes in CA between $500k and up to several million in value with LTV's over 90% is staggering now and defaults on higher end properties are showing steady increases in many areas.

Know that I know more about the legal scams lenders and servicers are perpetrating on the public, I wonder how revenue from "insurance recoveries" is reported and what contribution this revenue is making to overall income for lenders who are not lending.  I also wonder if the GSE's collect CDS insurance too? This would constitute a massive additional resource transfer through tax payers (the public sector) into the already TARP engorged pockets of lenders as the GSE's refinance bad paper from other lenders that will eventually default and result in taxpayer funded losses.

I still believe we in CA (and AZ, FL, NV) are not finished with the price slide in total,although we may be near a bottom in outlying overbuilt areas where pricing has dropped 40-50% or more from the peak and values are more in line with historical price/buyer income ratios. I think we may be closer to a tipping point to the downside in larger, higher priced properties as there has been some capitulation from sellers who need to get out and there is downward pressure on pricing because of financing constraints for new buyers. If buyers have to come in with 30% or more in cash, there will be far fewer transactions except perhaps at the high end (where money doesn't matter?). If the markets can somehow maintain pricing levels and there is no large scale solution to provide highly leveraged transactions, there will be fewer transactions.

Ultimately, the market will decide values and they will be driven by affordability and availability of sustainable financing. It seems that millions of homeowners who could sustain home ownership with principal reductions, will be forced out of their homes, to the short term benefit of lenders and servicers collecting fees or "insurance" on foreclosures and benefiting from taxpayer bailouts.