Pretend and extend | Napa Valley Register

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Pretend and extend

Saturday, September 05, 2009

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From the smallest household to the largest corporation, the financial mantra of the day is the same: pretend and extend. In an age where property values are dropping and cash is king, lenders and spenders look to the promise of a better tomorrow allowing them to turn their focus away from the less attractive realities of today.

To pretend and extend is a philosophy of taking the necessary actions to “buy time” until economic conditions improve. It may also be akin to knitting faster before you run out of yarn.

Nowhere is the process of buying time more visible than with lenders holding home loans in default or seeking to make any reasonable note modification. A long-predicted second wave of home foreclosures has spread a fear of anticipated disaster that has thus far failed to materialize.

According to the Web site First American CoreLogic, near one-third of all U.S. mortgages are currently in excess of their home values. This leaves 15.2 million borrowers in a negative equity position. It was also reported that 2.5 million homes were within 5 percent of becoming negative as of June 2009.

Not a bright picture under any circumstances. Yet, in spite of all this statistical analysis the reality of a second wave of foreclosures has yet to come ashore. There are several factors that may impact why the banks have been reluctant to place foreclosed homes on the market or take an aggressive stance with default borrowers.

First is the reality that banks do not want to own homes. They are in the business of lending money and receiving interest for doing so. They are not in the landscaping, property management or home improvement business. Thus, an occupied home, on almost any terms, is preferred to having a vacant devalued asset on the books.

The second factor is that banks, as any other seller, are reluctant to sell if they believe market values are rising. As we rise from the bottom and see multiple offers on properties, by doing nothing banks are sitting on a rising tide and regaining a portion of their depressed values.

A third factor is that banks are always reluctant to face the reality gap between the value of an asset on their books and the true value at sale. To the extent they can “pretend and extend” they are able to show their investors retained asset or loan values yet exposed to the light of day.

Bank loan modification departments today often sound like the classic car salesman with an opening question of “how much can you pay”? The irony of the loan modification process is that it has been just a short five years from borrowers submitting enhanced loan applications proving their worthiness to now demonstrating their hardship to obtain a modification.

As we rise each day, borrowers and lenders alike, our trust and faith is placed in the belief that tomorrow is going to be better than today if we can only buy time.

Yet, for the moment only one option remains: pretend and extend.

(Bogue is a real estate broker in Napa. He can be reached at 486-5511 or cbnapa@napanet.net.)

1 comment(s)

nuttinpersonal wrote on Sep 5, 2009 1:02 PM:

" "Yet, in spite of all this statistical analysis the reality of a second wave of foreclosures has yet to come ashore."

Before the subprime defaults started to really implode, people pointed at the default rates saying that everything was ok. Let's look forward to what's coming.

First, 2009 is the relatively down period between the first wave of subprime ARM resets and the second wave of very nasty option and alt-a ARM resets. The resets pick up in earnest in 2010 and are expected to peak in 2011. Google "Credit Suisse ARM reset."

Second, don't forget about all of those ill-conceived taxpayer-backed FHA loans that were issued in 2009. Somebody thought it would be a good idea to make homes available with 3% down. Combine that with a government tax credit for new home buyers and you have the US government paying new buyers to take on a mortgage. How much you are underwater vs. how much skin in the game you have is by far the largest predictor of default. Because the government thought that two terrible waves of foreclosures wasn't enough, they decided to create a third wave. Expect the FHA to require a taxpayer bailout within the next 12 months as the FHA defaults continue to skyrocket. Also expect a tightening of lending there too.

Third, unemployment is going to be at least a multi-year issue. Without irrational lending to power housing, you are back down to household income to support housing. We're going to easily pass the 10% rate that was the basis of the government "stress tests" on the banks. Any recovery after we hit bottom is going to be slow.

Let's revisit in late 2010 and see how things are going then, shall we? "

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