2012 begins with much still unsettled in the banking world, and how it all shakes out will affect millions of borrowers. Some banks are still reeling from the aftershocks of the mortgage-lending crisis, and massive lawsuits are currently pending against numerous large financial institutions, some with potential penalties large enough to make the survival of some banks questionable.
Housing’s Effect on the Economy
Much of the lingering malaise dragging on the economy is related to the behavior of the banks. Lending money to future homeowners triggers builders to build, meaning they have to hire carpenters, plumbers, electricians like the Electrician in Frankston and all the other trades to construct the home.
The workers constructing the home have to buy materials, driving additional economic activity. The mortgage crisis and accompanying foreclosure disaster has virtually shut down new home construction and all of the construction jobs that go with it.
No Fault but Their Own
It is difficult to have much sympathy for the banks and other lenders, as the mortgage crisis was almost entirely of their own making. Shoddy lending practices, inadequate oversight and large profits led to the inevitable collapse of real estate prices, and with it, the economy.
Unfortunately, We Are All In This Together
Currently, the some of the doldrums the economy is suffering from can be tied to the refusal of lenders to recognize that billions of dollars of apparent real estate value contained within their mortgages was illusory, created by their market manipulation during the bubble.
Consequently, vast numbers of loans are hopelessly overvalued, and their borrowers underwater. All of these loans need to be modified, with the principle reset to the “real” value of the property.
The Federal Reserve reports that the value of real estate has fallen by $4.2 trillion since 2006, but banks have failed to recognize this correction on their balance sheets.
Lenders have been resistant, because it means individual banks (and their managers) would have to recognize large losses. It is to their advantage to hold off as long as possible and leave the risk of loss on the borrowers.
With multiple lawsuits from states’ Attorneys General pending, some of this might begin to happen this year.
According to the LA Times, the settlement would “include a component for ‘principal write-downs,’ the reduction of mortgage debt for individual homeowners.”
Struggling homeowners need the real estate market to begin recovering, and for that to happen lenders have to begin lending. None of this is likely to happen until the real estate values reflected in mortgages begin to reflect reality.
Source: “Will 2012 Be a Good Year for Homeowners or Banks?” Huffington Post, 1/20/12