Industry analysts are beginning to question whether servicers that delay foreclosure proceedings are essentially delaying an even bigger backfire when property values decline further, according to an Aug. 27 American Banker story.
At issue is the practice by many lenders over the last two quarters to take reserve releases
based on more bullish assumptions about the value of distressed properties. While accounting rules mandate that
banks set aside reserves covering the full amount of their anticipated losses on nonperforming loans, banks are reluctant to foreclose on properties or test valuations that may show they have wrongly gambled on a broad housing recovery that is not coming
soon, American Banker reported.
The strategy of many banks has been to postpone the date at which they lock in losses, thereby delaying foreclosures and potentially benefitting from the recovery of the nation’s real estate market. But as housing prices continue
to slip and sales slow – sales of homes in July slid to the lowest level on record – lenders are faced with the prospect that a rash of foreclosures and major losses could be on the horizon.
"The math doesn't bode well for what is ultimately going to occur in the real estate market," Herb Blecher, a vice president at LPS, told American Banker. "You start asking yourself the question when you look at these numbers whether
we are fixing the problem or delaying the inevitable."
American Banker reported that some servicing executives acknowledged that as banks stall on foreclosure proceedings, delinquent borrowers may get a reprieve, but a bottleneck of foreclosures hitting the market is likely to pull down existing home prices
and thwart the growth of new sales.
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