Tuesday, October 12, 2010

ForeclosureGate Harming All Markets?

Very busy on a number of matters here today, so, I'll apologize for the brevity of this post in advance.

The ongoing saga of residential real estate in the USA just continues to escalate. While more in the banking and investment community are saying a nationwide moratorium on foreclosures would be very damaging to the economy, voices on the other side of the debate, many calling for a complete halt to foreclosures and evictions, are expressing the concern that such a national stop and reset would be the proper first step toward fixing the very sick residential real estate market.

The problem is that real estate is a huge part of GDP and post-foreclosure sales of bank REO properties have been making up 25% of the total for some time now. Stopping the flow is going to have a material effect on GDP. Shutting down foreclosures and sales will throw us right back into recession, almost without a doubt.

Even as it is, without a national moratorium, hundreds of thousands of foreclosures are already in no-go mode and state Attorneys General are ramping up efforts to investigate, the latest being NY AG Andrews Cuomo - incidentally running for governor - who is calling on the four biggest lenders, Ally (GMAC), Chase, Bank of America and Wells Fargo to immediately halt all foreclosures, which - news to the AG - all but Wells Fargo have already done.

Further, 40 state AGs are due to announce (possibly as early as tonight) a joint task force to look into "robo-signing" and other allegations of fraud and abuse by the mortgage servicers.

All of this confusion will lead to a frozen real estate market. Anecdotal stories of short sales halted and prospective buyers preferring to "wait and see" are contributing to grind the already-maligned real estate business to a complete halt, and it seems to be spilling over into other markets, particularly stocks, which essentially treaded water for the second straight day.

Dow 11,020.40, +10.06 (0.09%)
NASDAQ 2,417.92, +15.59 (0.65%)
S&P 500 1,169.77, +4.45 (0.38%)
NYSE Composite 7,489.62, +10.61 (0.14%)

Advancers beat decliners, 3259-2433. New highs: 394; New lows: 36. Volume was improved from Monday's holiday-held-back level.

NASDAQ Volume 1,984,735,250
NYSE Volume 4,233,061,500

Oil dropped 54 cents, to $81.67, heading back to the security of the $75-80 level. Gold lost $7.70, to $1,346.70, while silver slipped 20 cents, to $23.15.

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