Wave of Voluntary Strategic Defaults Coming: 20% Under water

Editorial Comment: Actually the number is far higher. We compute it as around 45% when all is said and done. First of all there is consensus that property values are actually around 15% less than seller’s are asking. Second costs of selling the home makes up the rest, taking another 6-10% off the selling proceeds.

The break point where people go for “jingle mail” sending the keys back even if they are current is when that value is less than 75% of the principal due on the mortgage. In that sense, the 1/5 figure is right.

What has NOT been computed is what will happen if the growing trend toward strategic defaults (jingle mail) becomes a stampede. I think it will do just that — and further the trend will probably spread to other loans, especially those have been securitized like credit cards, auto loans, and student loans where the loan originator never advanced a penny toward the loan and just collected a large fee.

Investors and borrowers need to get together and work out the details, throwing the loss onto the “banksters” (Pecora term from 1930’s). Disinformation is being spread and believed. The creditors and the debtors are being intentionally blocked from knowing their relationship to each other. When they DO know, the ship will turn back over and start floating again — at the cost of those who perpetrated the largest fraud in human history.

There IS a way to work this out but not if the goal is to save the banks that created this mess. We have at least 7,000 other banks, TARP and other bailout money available, and an IT infrastructure that can be used today to provide the full range of services and conveniences that the “too big to fail” banks use to beat down the competition from community banks and credit unions.

Associations of community banks not controlled by large regional banks can play a pivotal role in this. Where the associations are controlled by the big banks like Florida bankers Association, the community bankers need to re-start their own association.


One-Fifth of U.S. Homeowners Owe More Than Properties Are Worth

By Daniel Taub

Feb. 10 (Bloomberg) — More than a fifth of U.S. homeowners owed more than their properties were worth in the fourth quarter as the number of houses and condominiums lost to foreclosure climbed to a record, according to Zillow.com.

In the fourth quarter, 21.4 percent of owners of mortgaged homes were underwater, up from 21 percent in the previous three months and down from 23 percent in the second quarter, the Seattle-based real estate data provider said today in a report. More than one in 1,000 homes were repossessed by lenders in December, the highest rate in Zillow data dating back to 2000.

Underwater homes are more likely lost to foreclosure because their owners have a harder time refinancing or selling when they get behind on loan payments. U.S. home values dropped 5 percent in the fourth quarter from a year earlier, the 12th straight quarter of year-over-year declines, Zillow said.

“While the next few months are likely to bring further home value declines in most markets, we do expect to see a national bottom in home prices by the middle of this year,” Zillow Chief Economist Stan Humphries said in a statement. “Thereafter, home values are likely to bounce along the bottom with real appreciation remaining negligible for some time.”

There were 2.82 million foreclosures in the U.S. last year, according to RealtyTrac Inc., the most since the data provider began compiling figures in 2005. The number may rise to 3 million in 2010, the Irvine, California-based company said last month.

Bank sales of foreclosed properties accounted for a fifth of all U.S. home sales in December, Zillow said. Such transactions made up 68 percent of sales in Merced, California; 64 percent in the Las Vegas area; and 62 percent in Modesto, California, the company said.

Almost 29 percent of homes sold in the U.S. went for less than their sellers originally paid for them, Zillow said.

The closely held company uses data from public records going back to 1996. Its mortgage figures come from information filed with individual counties.

To contact the reporter on this story: Daniel Taub in Los Angeles at dtaub@bloomberg.net.

Last Updated: February 10, 2010 00:01 EST

Citigroup et al Bailouts Present Additional Defenses Againsts Collection of Virtually Any Debt

Think about it. You are a taxpayer and your tax dollars are absorbing the “losses” associated with write-offs of your debts (mortgage, credit card, auto-loan, student loan etc.) whether you pay or not! The reason for the toxicity of those assets the government is eating up is NOT because of defaults, it is because the paper is bad to begin with. In plain words, those debts are not enforceable because the securitizers and investment bankers didn’t follow the rules and intentionally defrauded both the investors who put up the money and the “borrowers” who were in actuality the unwitting parties to a scheme to issue unregulated securities under false pretenses. Unless the “bailout” goes to the actual victims of the fraud instead of the perpetrators, how are we ever going to show our faces in the world financial markets again?

The Rescue of Citigroup


Too big to fail and increasingly desperate as investors fled its shares, Citigroup last night agreed to be rescued by the troika of agencies that have been gathering the U.S. financial system under a government umbrella in these desolate times.

The Federal Reserve, U.S. Treasury and Federal Deposit Insurance Corporation late last night unveiled the rescue of the banking giant, a “package of guarantees, liquidity access, and capital” aimed at stabilizing financial markets and reviving the faltering economy.

In part the package marks a return to Treasury’s focus on the troubled, mostly mortgage-backed securities that have encumbered Citi’s balance sheet and those of other banks and that were the original target of Washington’s $700 billion bailout measure. Citi will have to absorb the first $29 billion in losses on what the bank and agencies calculated to be a $306 billion portfolio, and taxpayers would be responsible for losses after that. In exchange, Treasury and the FDIC will get $7 billion in new preferred Citi shares that come with a dividend of 8%.

Treasury will also give $20 billion to Citi for additional preferred shares, and in turn attain authority over how the bank compensates its executives and Citi’s compliance with an FDIC program to help homeowners with troubled mortgages. This would come on top of the $25 billion in funds Citi received when it and other banks accepted government help this fall. Last night’s announcement, though later than planned due to hitches in the negotiations, was the latest aimed at preceding global markets’ weekly open. And though it concerned just one company, the ramifications of Citi’s travails would seem to make the deal mark another milestone in this season of bailouts. “If the government’s rescue plan is a success, it could help bring stability to the entire financial system,” The Wall Street Journal says. “If it doesn’t, even deeper doubts about the industry’s future could spread.”

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