Foreclosures Will Moderate as Home Prices Continue to Fall

July 20, 2008

There will come a time when most of the homeowners that intend to walk away from their mortgages have done so. True, whether defaulting by choice or by the lack of the ability to pay. As the 2005, 6 and 7 vintages mature, their default rates will be more tied to the local economies than bad underwriting. Unrealized losses related to the fluctuations in housing prices will become less relevant.

Some of the strongest banks have recently announced plans to eliminate prepayment penalties on the first mortgages and freeze or lower rate adjustments on the home equity loans that they maintain on their balance sheets. We are beginning the see a divergence between bank owned loan modifications and securitized loan modifications. This trend will strengthen the commercial and savings banks at the expense of the investment banks. No government programs required.

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