Mortgage lenders have been foreclosing on a lot of homes these past couple of years.  Some flip the houses immediately – putting them back on the market as a foreclosure or REO (or real estate owned aka bank owned).  However, others are holding on to the inventory they’ve acquired through foreclosures, jingle mail, or deed in lieu of foreclosures.

Why would they hold?  To not flood the market with a huge wave of foreclosures is one theory.  However, Les Jones and his bouquet of weeds links to this story from the real estate channel that emphasizes another possible reason,

With the expiration of the first-time buyer tax credit on April 30, there are now two main props keeping the housing market afloat.  One is the growing percentage of home sales financed by Federal Housing Administration (FHA) loan guarantees.  The other is the refusal of banks to put on the market foreclosed homes over $300,000.

… Even more crucial is that selling substantial numbers of expensive homes at discounts of 50% or more would compel the lenders to take substantial losses which have been avoided by keeping them off the market.

The theory Les proclaims is worth reading all the way through, but here’s part:

If a bank holds a $500,000 mortgage they can pretend it’s still worth it, even if it would sell on the market today for $300,000. If all those mortgages were marked to market (value), the banks would be declared insolvent. The FDIC would march in, close the bank, and either sell it to another bank or shut it down and pay the depositors.

I suspect we’ll see more bank implosions if banks continue their marked to market strategies.  I can’t get a $300,000 loan on a home worth only $175,000 in today’s market.  The lenders are holding out so their accounts balance, but for how long?

Thanks for the heads up, Les.