Banks & Foreclosures: Rational Actors or . . .

. . . Foot-Dragging Ostriches?

Just a heard a very thorough -- and harrowing -- overview of the foreclosure picture nationally from Rick Sharga, a senior executive at RealtyTrac.

His company compiles one of the most complete databases tracking foreclosures, so he's speaking from authority.

What does he see?

--The housing mess is going to persist longer than is currently projected, because rising unemployment is exacerbating the problems with dubious mortgages -- especially Option-ARM's -- originated when the housing market was flying high.

Think of it as two rivers merging into a mega-river.

So when does he expect to sound the "all-clear," signifying a return to "normal" housing market conditions?

Not before 2012, and perhaps 2013 (no, not a typo).

--Peel back all the confusing statistics, short-term noise, etc. and the current foreclosure numbers are staggering.

According to Sharga, prior to 2009, there's never been a month where the number of foreclosure notices exceeded 300,000. Just so far in 2009, there have already been seven such months.

--Conventional wisdom is that every 6-10 job losses result in one foreclosure. However, because there's typically a 3-6 month lag, there are lots more foreclosures in the "pipeline."

Foreclosure Pain: 4 More Years

More gloomy news:

--Foreclosure pain has metastasized, spreading from places like Southern California, Florida and Arizona to previously unaffected places like Portland, Boise, and the northern Virginia suburbs.

--A combination of logistical delays, federal intervention, and the banks' self-interest are keeping many would-be foreclosures off the market -- for now.

According to Sharga, a bank that forecloses on a home can expect to incur $100 a day managing it, paying the utilities, taxes, etc. That comes to about $36k a year.

Now assume that the bank originally lent the homeowner $600k, and that the home is currently only worth $300k. When the home sells in foreclosure, the bank stands to lose more than 8x its annual carrying charge.

What initially looks like ostrich-like behavior on the banks' part suddenly seem quite rational!