A survey finds that 15.9% of sales were short sales, and only 13% were REO (post-foreclosure, bank owned). This is another positive trend, among crappy trends. It means banks are shaking bad loans before they become full foreclosures. The reset on housing values is being engaged.
Add those numbers together, and 28.9% of all sales are ‘distressed’ in January 2010. It also means that a new asset class is being created on the balance sheets of lenders - Deficiency Judgments.
If every short sale and foreclosure results in a loss to the bank, many of these banks are ‘booking’ the loss as a deficiency judgment that they can later (up to 7 years in the future) reach back to their borrower and ask for repayment. Many of these judgments will be monetized and resold to other investors who will chase the consumer borrowers for repayment. Judgments are legal claims that can create future liens on new homes, and garnishments on future wages.
It’s an ugly thought that consumers are walking around feeling like they shook off that bad debt in a foreclosure, or sold that underwater house in a short sale, only to find out in 5 years when they have savings and a new home again, that they still owe the interest, legal fees and bank’s losses?
And we expect consumers to smile and get back to spending when millions have new encumbrances? Is debt amnesty is in the future?
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