Tuesday, March 04, 2008

Easy For HIM To Say!

On the face of things, this sounds like a good idea:
Federal Reserve Chairman Ben S. Bernanke, battling the worst housing recession in a quarter century, urged lenders to forgive portions of mortgages held by homeowners at risk of defaulting.

``Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,'' Bernanke said in a speech in Orlando, Florida today. ``Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.''
Approximately ten percent of mortgages in the country are in technical default, meaning that the amount owed to the lender exceeds the market value of the house. Figure another twenty percent beyond that are at or just around a default, meaning that if housing prices drop any further, they too would risk being in technical default. This doesn't take into account actual defaults, where families simply toss the keys on the table and walk away, unable to make anymore payments.

So would banks agree to this?

Probably not, except in limited circumstances. I can visualize a scenario where banks decided to reduce some mortgages on borrowers who they deemed to be good re-risks: in other words, likely to come back and borrow more, which would make up some of the reduction in loans receivable for the bank's balance sheets.

Widespread mortgage reductions simply ain't happening and we have only to look as far as the new Visa IPO to see how silly this talk is.

If you don't know about this, a consortium of banks owns the Visa credit card as a private joint venture amongst them. These banks are attempting to spin off the Visa division as a stand-alone public company.

Odd time to spin off a credit card company, don't you think? Consumer defaults on credit cards are at all-time highs, lending risk is skyrocketing, and people are maxed out on their credit cards. How could Visa possibly mine new territory now in order to make the IPO work?

Many reasons have been put forth for this, but underlying all these excuses seems to me a very simple piece of logic: the banks are seeing what Bernanke is seeing and taking self-serving action to support their own stock prices: they are off-loading bad debts not by expensing them and taking a hit to the bottom line, but by moving them into the new Visa entity, then spinning that off to basically drop dead and drop their debt off on the suckers who buy the stock.

This will give the banks the funds necessary to try to salvage their mortgage banking business, roughly $10 billion across the IPO.

Naturally, this makes the shareholders of the banks happy and they would not be pleased to see that money "squandered" on some bunch of suckers who borrowed more than they should have.

I guess it's easy to be bloodless when your blood runs cold anyway.