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Bank Bailout Effects

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Posted On: 12/18/2013

Question:

Did bailing out the banks prevent home values from falling further? I ask because I believe, with the bailouts, lenders could afford to hold on to underwater properties until prices rose to their liking.

Answer:

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Banks do not gleefully acquire borrower homes. The property is security for a loan. When a borrower is unable to pay the loan, the lender does not just get title. Instead, the property is foreclosed.

The foreclosure process exposes the property for sale to the public. The idea is to get the highest possible value at auction because any price above what's owed to the lender is paid back to the owner. However, the owner rarely gets money from a foreclosure for two reasons: If the local home market is strong, the property will rarely go to foreclosure because it can simply be sold. If the market is weak, a foreclosure sale will not result in a sale price higher than what the owner owes.

To make matters more complex, the mortgage is likely not owned by a "bank." Instead, it is probably owned by an investor such as a pension fund or insurance company. These investors are now suing lenders for hundreds of billions of dollars, claiming that the mortgages they bought did not meet promised standards.

It can be argued that federal bailouts allowed lenders to hold foreclosed properties for longer periods and that by keeping large numbers of distressed homes off the market, there was less pressure to reduce home prices. However, other factors also prevented quick sales.

First, lenders were not equipped to handle the volume of foreclosures that arose.

Second, with robo-signing problems and electronic note issues, lenders in many states could not quickly foreclose properties even if they wanted because of litigation delays.

Third, in major foreclosure centers the market for such properties was so weak that selling quickly was not a viable option.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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