The following clips from the Congressional hearing on foreclosures provides some insights into how bad the foreclosure problem actually is. In brief, if banks were to actually account for their mortgages properly, they would be bankrupt overnight.
This analysis is provided by Adam Levitin of the Georgia University Law Center:
We don’t actually know how many mortgages there are in the U.S….somewhere between 50 and 60 million.
Of the mortgages that are on bank books, if the loan defaults, the bank can stretch out the period of time before foreclosure. That means that the bank is stretching out the time before the bank has to recognize the loss. If the bank modifies the loan now, let’s say writes down principle amount, it’s taking an immediate loss. This is particularly a problem with second mortgages because almost all second lien mortgages are on banks’ books.
There are around $400 billion in second lien mortgages out there held by the four largest banks, Bank of America, Chase, Citi and Wells. That’s roughly equal to the market capitalization of those four banks. So, if they started writing off second lien mortgages, they’d have no capital left, they’d be insolvent.
Watch Clips from Congressional Testimony:
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