You Decide

July 29 (Bloomberg) -- House Financial Services Committee Chairman Barney Frank threatened to revive the mortgage “cram- down” bill that stalled in Congress this year, saying lenders aren’t being aggressive enough in modifying troubled home loans.

Cram-downs let federal judges lengthen terms, cut interest rates and reduce mortgage balances of bankrupt homeowners, even if the lender objects. Congress gave the mortgage industry every legislative tool it requested to allow them to more easily modify loans for those facing foreclosure, and the results have been below expectations, Frank said in a statement today.

Americans: He's lying but he desperately wants you think he cares about you.

He does not.

Here's the math:

There are about ~13-15 million homes that are underwater in this country - that is, the mortgage outstanding exceeds the current market value.

The math takes a bit to derive but this is the best guess I've got given the data available in the various MSAs, the decline in Case-Schiller, bubble pricing the new and existing home sales from 2003 to present.

The average home that is underwater is at helium depth to the tune of about $75,000.  Some much more ($300,000) and some significantly less (e.g. $20,000.)

Now let's modify them all so they're no longer underwater!  That is, simply forgive principal down to current market value.

Ok: That's 975 billion dollars, or close to a trillion.

Guess who eats it?  The banks.  What happens if the banks are forced to recognize a trillion dollars in losses that they have (so far successfully) managed to shove under the carpet and pretend that they do not exist?

Any questions?

The banks are not modifying these loans in that fashion not because they want to be "mean", but rather because on a market value basis for these loans they are all insolvent right now and have been for over a year, as I have repeatedly outlined in The Ticker.

Indeed, it is precisely this issue that led me to begin writing Tickers in the first place, beginning with Washington Mutual in the Spring of 2007!

This sort of "book-cooking" is outrageous and it is in fact exactly what Japan did when their banks got in trouble doing the very same thing - blowing an asset bubble by lending into it at Warp 9 with no prayer of being able to recover anything close to the lent value on a foreclosure.

The banks' only hope is to keep "extending and pretending", falsifying the claimed "value" of these loans, praying that they can get away with it for literally a decade or more (much as they did in Japan) while they charge you 30% interest on your credit card to "earn their way out" of the hole, thereby avoiding self-immolation.

Any action that forces them to recognize the market value of these properties causes all of them to blow up instantly as it reveals that the value of their assets are vastly less than liabilities. 

That is the definition of insolvency.

As such unless Barney Frank is prepared to send in the FDIC to close Citibank, Wells Fargo, Bank of America and dozens of other large and midsize banks right here and now this is just more hot air out of the well-used pie-hole of a guy who has never met a banking interest he didn't serve and protect.

And oh, by the way, if you think Bernanke has "fixed" anything, go read the above text again.