Sooner or later the banks are going to have to accept, as we are learning to accept, that the value of real estate has fallen.
Hence the value of their bonds has fallen.
What they ought to be doing now is writing down the principals on those mortgages to reflect the real market value of the real estate.
actually watching a special with shelia bair on cnbc a couple of weeks ago, jim cramer brought that very thing up. and shelia bair said at this point the law doesn't law for principles to be lowered.
You know in bankrupsty courts every kind of debt except mortgage debts can be written down.
given the fact that reality is causing the price of real estate to seek that magic relationship to what people are ACTUALLY making for a living now, I expect that sooner or later, if we are really hoping to save the banking system, we are going to have to accept that:
1. Those houses is not worth those astronomical sums that people paid for them;
2. Ergo the mortgages are not going to be the income streams the banks were expecting from them;
3. Ergo those bonds are not worth, what Moodys and Standard and Poor said they were worth;
4. Therefore the banks holding those bonds made of those real estate morgages are basically insolvent.
Either we allow the banks to write down the principles owed by the mortgage holders, and reconstitute the banks capitalizations based on these new amounts
OR...
We allow those buyers to go bankrupt.
Then, the banks holding bonds based on those mortgages all go bankrupt, and the USA taxpayer is totally on the hook for FDIC repayments as thousands and thousands and thousands of banks go belly up.
And you want to know what is at the very heart of this problem?
We ENCOURAGED (though goofy financing instruments) the prices of real estate to climb in price much higher than the average salaries of the working class could pay back for them.
Barrring any intervention, I suspect that median home price, which I think even now is probably in the $200,000 range nationally (about 4 times the median salary), is going to find a bottom at whatever the median income for a family in the USA will be.
If the median income is about $57,000?
Then the median home price will be not much higher than 125% of that median income.
And if THAT happens, then every bank and every bond based on the price of real estate is going to crash.
I heard yesterday that ALREADY, because of the dropping market values of real estate, nearly ONE IN FOUR current morgages are
technically "under water". People can still afford to pay their motgages, but the equity they THOUGHT they had in their homes is evaporating.
Sooner or later, the people whose homes are deeply under water, are going to decide that paying too much for a home they don't own any equity is foolish.
Even people who thought they had a LOT of equity, are going to wake up and realize that they're NOT putting anything away for their futures by paying off their homes.
And for MOST people in the USA, the ONLY real asset they ever had was the equity they were building up in their homes.
When the declining market value of RE takes
that away from them, and when the decline means that there is no sense continuing to pay mortgages based on values that no longer exist, people are going to seek other places to live.
They'll rent or they'll buy homes which are priced at the REAL MARKET VALUE of homes today.
And in those parts of the nation where the market prices of homes was wildly out of kilter with the local incomes, those areas will be completely devasted by this process.
That map which I and others have posted, the one that shows where homes are in foreclosure, could get much MUCH redder if we don't figure out what to do, and do it,
STAT!
Maine is mostly in the blue, BTW, for those of you who care about what's happening to home values here.
Basically, the market prices of homes here has NOT been going up as quickly as it had in those places denoted on that map which are pink or red.
We're still safe...but for how long?
Nobody and believe I mean NOBODY really knows.
