Close to 7 million mortgages amounting to over a trillion dollars are being transferred by Bank of America into a Bad Bank Model in order to start dealing with the massive shadow inventory being held. They are putting these loans into a “Bad Bank” to liquidate them. This is about half of all of Bank of America’s mortgages. We are seeing more and more homes hit the market to slowly leak out the inventory. The actual number of distressed inventory is down from a year ago from approximately 8 million mortgages to 7 million but the time of delinquency before foreclosure has risen from 410 days to 507 days. People are staying in homes for over 1.4 years before foreclosure. Even thought default rates have come down over the last year foreclosures have increased across all loan types over the last 6 months as banks get a better handle on dealing with the delinquencies and implement more streamline foreclosure systems. The numbers are staggering, especially in California where the housing prices are still artificially high. The new subprime loan is the FHA loan with delinquency rates skyrocketing as people only put 3.5% down along with further reductions in values causing people to go underwater in equity. However, the option ARM loan is the most toxic of all loan types and 50% of all outstanding loans in California are option ARMs. It amazes me that people still invest in the California market for buy and hold investments. If you are investing for cash flow, get out of California. The rent to price ratios do not make sense, especially when taking into consideration the risk of the market and the current economics.
This problem is going to continue until the banks are held responsible for their lending practices. Currently the government is by far the largest mortgage lender at 86% of all loans. The government is running the housing market right now and letting people put less than 4% down in a declining market. This means they are artificially propping up the housing market by lending but in doing so causing further deterioration of the quality of the mortgages and increasing default rates into the future. The FHA loans default rates are skyrocketing and FHA loans are still the primary lending source. This is like betting on the Cleveland Cavaliers to win the NBA Championship the day after Lebron James left, things are just going to go downhill further. What is absolutely crazy is that when this entire mess started the banks made all of these risky loans, sold them to wall street as triple A rated paper and then bet against them because they knew they were risky. And why aren’t these bank CEO’s in jail with Madoff? Because they give political contributions. What happened to the good old days when a bank would not lend you money unless it was less than 25% of your annual income? What happened is the banks have found a way to line the politicians pockets so that they can lend without recourse for their actions.
Now why pay attention to all of this information if we cannot do anything about it. Actually we can, the more educated we are about the current economic problems the more we can strategically place our investments for growth and control. For example, after going through this housing meltdown don’t you think it would be a good idea to invest at an all time low in the housing market cycle (in some markets) for cash flow ONLY and not for capital gains (or appreciation) first? If you invest for cash flow then you have more control over your assets. The assets value should be determined based on how much cash flow it gives you not based on some appraisers opinion. Find ways to take advantage of the economic problems and increase your financial intelligence in order to take control of your financial future
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