A Wipeout in REO Recoveries on Horizon

April 9, 2012

Reuters is out with a story about the pipeline of 1.25 million neglected homes that are headed for auction this year. The inference of the article is that these homes will further depress the housing market. I have no quarrel with that observation, but the larger question is the large recovery losses on these properties.

The Cleveland Fed has a report out saying one-fourth of these now need to be bulldozed. It is no mystery that the elements can completely wreck a perfectly good house.  I saw one in Hawaii, that I felt was a 80% loss on a $500k mortgage. If we did a conservative SWAG of $100,000 lost per house on market declines and decay, that would total $125 billion on losses just for this segment of the housing stock.

It is also no mystery who holds the bulk of this trashed housing inventory: the Too Big to Fail Banks, the GSEs, and  the Fed. I refer you to my article on the Fed’s zero-integrity stress test for more details on the subject. Apparently, the crew who did the stress test ignored the bulldozer report from the other folks at the Fed?  Nao combinam. Total capital for the top six banks is $632 billion, leveraged 13X. The recovery losses on the next round of 1.25 million foreclosures  is just one aspect of the loss equation for these banks.  Add in the mortgage cost settlements, etc ,etc. The ten large banks had $127.2 bn in loan loss reserves at the end of 2011. Nao combinam.

One Response to A Wipeout in REO Recoveries on Horizon

  1. Russ Winter on April 10, 2012 at 10:34 am


    What utter nonsense:

    Too Big to Fail Banks are also still subject to clawbacks on their merda pawned off on others.

    Don’t forget the shit pile of home equity loans the banks hold.

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