When Foreclosures Will Increase

We all know that there have been foreclosures across the United States; but, millions are still living in homes which they have not paid a mortgage for in a couple of years. Why haven't the banks foreclosed? The answer is because they have been busy selling their mortgages to the government and the Federal Reserve. That is what Quantitative Easing 3 has been about.

The big banks began giving loans to anyone and everyone knowing that they could not pay going back to 2001 or so. In 2007 it became apparent that people could not pay back their loans and that housing prices were unsustainable. The result was housing prices depreciating as much as 50%. Banks that were holding those loans went bankrupt and the government ended up having to take tax payer funds to bail them out. That is the starting point.

In order to take these loans off of the balance sheets of the banks, the Federal Reserve began buying the mortgage back securities from the banks. Now that they have purchased most of the mortgages, there is no longer a need to keep the market value up of these houses. When the balance sheet of the Federal Reserve is adjusted down it will be taxes that pay them back.

In short, banks made bad loans, profited greatly from it and then sold those bad loans to the government and Federal Reserve. Once the Federal Reserve stops buying these mortgages it will be because all of this debt will now be on the government. At that point, Fannie Mae and Freddie Mac will accelerate foreclosures and allow the balance sheet be be marked to market, to actually reflect the odds of getting paid back and the difference will be made up in taxes.

So, what does this mean for the housing market? Well, it means that home values will plummet again. This was hedged somewhat by the fact that most housing purchases in the past couple of years were paid for in cash by foreigners and hedge funds. QE3 was designed specifically to remove overpriced housing mortgages from the banks and with that now complete the tapering has begun. Once the tapering is complete the foreclosures can be completed and the real estate market values will adjust based on those who purchase those homes.