Sub-Prime Meltdown

[buck09]

Question: If the banks are "creating money from thin air" to finance mortgages, why are they having so much trouble in their sub-prime markets?

I'd be curious if anyone has run into rationalizations from the anti-fractional banking crowd...

Also - is anyone seeing an upswing in court filings with mortgage elimination nonsense lately?

[Prof]

No, but we anticipate our foreclosure practice to increase and our consumer bankruptcy filings to go up at the same rate.

[ErsatzAnatchist]

Consumer bankruptcy filings are increasing in NH. In addition, more and more people are filing chapter 7 and walking away from their homes. Last year, more people were trying to save their home from foreclosure by filing a chapter 13 bankruptcy.

Times for bankruptcy lawyers (creditor and debtor) and foreclosure lawyers are going to be good for the next couple of years.

[Imalawman]

As you're all aware I work on the state tax side and I handle mortgage foreclosure cases for the Dep. of Revenue (tax lien interest). I'm getting double the amount of mortgage foreclosure cases compared to last year.

[Judge Roy Bean]

Some may note that I haven't posted a new article on the ol' Creditoris Squaliformes blog since February. The simple fact is, it's becoming more and more relevant each week.

While all the machinations in the financial markets function in the background, anyone with a mortgage has to be keenly aware of what takes place in the coming months regarding their loan.

Two key factors may affect far more people than just the unwashed masses of sub-prime borrowers:

First, if housing prices depress further, equity will continue to vaporize. In many cases, homes will be worth less than the amount owed on them, particularly in those where the initial appraisal was inflated. This may be a disincentive to foreclosure, because too many upside-down properties in the lender/servicer REO inventory is a ticket to bankruptcy.

OR - enter the second factor: Loans and distressed portfolios are not sold at face value. In other words, opportunistic investors can and will be offered loans at penny-on-the-dollar values if the current note holder is in sufficient distress.

What does that create? Instant equity opportunity for the buying entity. The face value of the note may be $100,000.00, and the home's quick-sale market value may be $80,000.00, but the purchaser may have only paid $40,000.00 for the loan and is looking to turn that into $80,000.00 as quickly as possible.

What's the fastest way to make that happen? In many states the answer is foreclosure.

So don't assume that the "new" lender/servicer thinks about your property the same way the previous one has been. And the mythology of the servicer losing money on a foreclosure is just that.

Update: 8/21/07

There is an uptick in civil suits from investors, particularly those (like hedge funds) who went after the subordinated and residual (R-Class) certificates. This is the equivalent of sharks complaining about the quality of chum being used to attract them. After eating it, of course they're not happy they could find little else to feed on.

The finger-pointing wars are beginning in earnest.