As I have written for years, the true number of distressed properties or delinquent mortgages is significantly higher than what is published in most media outlets. In some "bubble burst" regions like California, Nevada, Arizona, and Florida, the potential delinquent mortgage numbers may be anywhere from 200% to 400% larger than what is being reported right now.
There are a number of reasons why U.S. banks are not readily admitting to how large the impending and forthcoming foreclosure "wave" is right now. First, banks do not want to admit or acknowledge how bad their financial losses are right now partly due to their concerns about their own stock values of their financial entities.
If the banks acknowledge their losses and take their financial "hit" for their quarterly or annual reports, then it may trigger a default on some on their off-balance sheet derivatives investments like Credit Default Swaps (a glorified hybrid form of an insurance and financial instrument).
A default of a multi-trillion dollar Credit Default Swap would effectively bankrupt the bank's parent company as many multi-trillion dollar Credit Default Swaps have also been leveraged 10 to 50 plus times their face amount.
To learn more about Credit Default Swaps, please view this video from the "Videos" section which is in regard to Long Term Capital Management's (LTCM - a $3 billion hedge fund business) collapse which almost single-handedly caused the world's financial markets to "freeze" back in the mid-1990s. LTCM was losing up to $500 million per day due to their hedge fund losses. Video link here -
The Credit Crisis is really all about the unwinding of primarily unregulated Credit Default Swaps, Mortgage Backed Securities, Interest Rate Options Derivatives (these financial instruments were the primary cause of Orange County's 1994 bankruptcy through their Merrill Lynch investments), Structured Investment Vehicles (SIVs), and other financial and insurance hybrid instruments.
The Credit Crisis is NOT a "sub-prime mortgage" problem as originally portrayed by many in the business media as delinquent "sub-prime mortgages" represent a tiny fraction of the delinquent financial debt worldwide.
To better visualize how large the entire Credit Default Swap and derivatives market is worldwide, some analysts project the current valuation of the derivatives market to be close to 1,600 TRILLION DOLLARS. As a comparison, the combined value of all of the real estate, bond, and stock markets on planet Earth was recently valued at a grand total of 100 TRILLION DOLLARS.
Many of the largest big banks in the U.S. have had to rely upon bailouts from the Federal Reserve in recent years via anonymous lending facility programs such as The Term Auction Facility, Term Securities Lending Facility, or as many as ten (10) additional anonymous lending facilities.
Banks borrow and lend money using a "Fractional Reserve" lending system in which they tend to leverage their deposits somewhere between 10 to 100 times the amount of cash on hand (i.e. customer's deposits).
As such, the amount of outstanding loans in the form of credit card, automobile, business, or real estate loans may completely dwarf the bank's true cash balances. In addition, most U.S. banks effectively maintain the equivalent of 0% to 1% (effectively ATM and minimal vault money) of their entire customer savings balances actually within the bank's vaults.
In late February 2010, a recent financial analysis projected that there were possibly 4.6 million plus mortgages in the U.S. now over ninety (90) days delinquent.
Many of my associates are telling me stories about homeowners who have not made a mortgage payment in over two (2) years, and they still have yet to receive a foreclosure notice.
In various "Trust Deed" states like California, lenders may not be able to pursue the delinquent homeowner for any future financial losses should the homeowner "walk away' from their "upside down" property if the homeowner used a "purchase money loan" to buy the property. If the property owner used a first mortgage loan or a concurrent 1st and 2nd (or a "piggyback" loan) to originally buy the home, then they may many times walk away from the property without fear of the lender coming after them for their losses.
If the property owner place a 2nd loan just one day after the original purchase date or refinanced their existing purchase money 1st mortgage (rate and term or cash out), then the lender may later pursue the property losses for any financial losses as they can do in Texas, and in many other states around the USA. For more advice on this complicated subject, please consult with your own financial advisors.
Barclays Bank and the Wall Street Journal are predicting about 1.6 million in distressed property sales this year via short sales or foreclosures. While this number is large, it is still 3 MILLION less than the projected 4.6 million plus mortgages which are thought to now be more than ninety (90) days delinquent.
In many cases, a bank may have to set aside up to $8 for every $1 dollar in acknowledged foreclosure losses. Since most large banks are effectively insolvent, they do not have the cash reserves readily available to cover any additional foreclosure losses.
In many situations, the stressed and cash-strapped homeowner is actually healthier financially than their own bank who struggles to avoid financial insolvency themselves. The smaller credit unions and community banks tend to be financially more solvent these days as they were less reliant upon the risky Credit Default Swap and other derivatives investments for higher yields in the past.
The good news is that more short sales are being approved these days as banks have to unload their non-performing loans anyway possible these days. In addition, there are more foreclosure investment opportunities than ever before if you know where to look for them.