Strategic default just got a lot more attractive

By Felix Salmon
October 8, 2010
announcement today in full:

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Has Bank of America’s PR department been taking lessons in gnomic utterances from Alan Greenspan? Here’s their announcement today in full:

“Bank of America has extended our review of foreclosure documents to all fifty states. We will stop foreclosure sales until our assessment has been satisfactorily completed. Our ongoing assessment shows the basis for foreclosure decisions is accurate. We continue to serve the interests of our customers, investors and communities. Providing solutions for distressed homeowners remains our primary focus.”

The quote marks are theirs: this is a “statement”, I guess, as opposed to a press release which might actually pretend to explain what’s going on here. But it actually gets even more ridiculous than that: BofA CEO Brian Moynihan is talking at the National Press Club today, and, according to the WSJ, “a person close to him said he isn’t expected to discuss the moratorium decision”.

If the biggest bank in the country announces that it has halted every single foreclosure proceeding in the country, you’d think it would spend a minute trying to explain what it’s doing and why. Instead, we just get meaningless pablum: “We continue to serve the interests of our customers, investors and communities. Providing solutions for distressed homeowners remains our primary focus.”

I can only conclude, here, that this decision was taken in a panicked manner, that it was pretty much imposed upon the CEO rather than decided by him, and that he wants to have some important conversations in Washington before saying anything specific about the bank’s foreclosure strategy.

But now that Bank of America has taken this step, expect GMAC/Ally to follow suit sharpish — it is owned by the government, after all, and should therefore be taking the lead in terms of trying to do foreclosures right instead of trying to push them through in a legally-dubious manner. And if those two firms end all foreclosures, the rest of the industry is going to be under a lot of pressure to do the same.

How long is the moratorium going to last? BofA says “until our assessment has been satisfactorily completed” — which could mean absolutely anything at all. But if I had to guess, I’d say through the end of this year at least. If you’re in default on your BofA mortgage, you just got a nice reprieve. And when the foreclosures start up again, you can be sure they’re going to go very slowly. Strategic default just became a lot more attractive.


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Being able to attenuate the mortgage payment is a good thing–assuming those funds will be coming in in the future.

And, as I’ve carped elsewhere, forestalling foreclosures isn’t going to reduce the value of those MBSes by anything noticeable if (and it’s a big if) they’ve been carried at their proper value.

So the question for both the mortgage payer and the MBS holder is how well is the property being valued, and is that valuation consistent.

Let’s be honest: if the value of the securities were actually being adjusted for the payments coming in and a reasonable estimate of the liquidation value of the property, no one would be panicking over “the market” right now.

Posted by klhoughton | Report as abusive

It says they’re stopping foreclosure sales, not foreclosures. In theory, at least, they could keep pursuing foreclosures while not selling anything until the title issues are cleared up.

Posted by mattm | Report as abusive


You’ll find a good hint as to how long the moratorium will last in whether they continue to file foreclosure actions or not. (As mattm pointed out, they’re only committing not to sell the foreclosed houses).

It often takes 6 – 18 months to take a foreclosure all the way through to sale. If the banks plan on reintroducing sales in 6 – 12 months, they may not bother stopping the foreclosure filings. If they plan to wait longer, I’d imagine foreclosure filings would drop as well – you can always start them up 6 months before you’re ready.

continue to file suits (and pay legal fees)in the interim, then

Posted by AnonymousChef | Report as abusive

If a was an American and I had problem (or not!) with my mortgage repayments, I would certainly try to negotiate a reduction of principal, interest and payments. Why? because the bank is certainly open to negotiate considering the costs and uncertainty of foreclosure. I would be ready to include a clause that if I fail to respect the negotiated conditions, the whole deal is dead and the bank is still at the starting point.
How I know that? Because I am a retired banker of 40 years experience in Canada.

Posted by jacqo | Report as abusive