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Quantifying Full Impact Of Foreclosure-Gate: Hundreds Of Billions To Start

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As people finally realize that there is no getting away from a self-imposed (or sent from above) foreclosure moratorium reality, the next question is the quantification of what the hit to banks will be. As bank stock shares are demonstrating today, it will be substantial and is already starting to be priced in. According to FBR's Paul Miller, as cited by Bloomberg, "faulty foreclosures may cost U.S. lenders $2 billion for every month that home seizures are delayed and the tab could reach $6 billion... Investigations of how banks are seizing homes may prolong foreclosures by as much as three months, at a rough cost of $1,000 per month for each property in the pipeline. The biggest firms likely need to add staff to comb through the files, costing them each $1 million a year." This is a very a modest estimate. More importantly, a separate study by SNL Financial has determined that the total amount of residential (not commercial) mortgages in foreclosure between directly serviced, and those serviced for others, for the big three banks alone (JPM, WFC, BAC) is nearly a quarter of a trillion dollars! And this number will soon surge. Keep in mind, as we disclosed yesterday, per JPM, the bank, which is a good proxy of the Big 3, keeps mortgages in the delinquent category for on average of 448 days before moving to foreclose (and 678 days in Florida and a stunning 792 days in New York). This means that banks, and especially regional banks, are about to experience the mother of all delinquency-to-foreclosure cliff events, as squatters now certainly will have no intention of ever paying down their mortgage. Which also means that the quarter trillion in foreclosed mortgages are about to explode by orders of magnitude. The hole could end up being as large as a trillion if one throws in the CMBS properties that are delinquent and in foreclosure ($61 billion in August per RealPoint). And poof, there goes the trillion dollars currently sitting in cash and doing nothing (as well as a generous helping of excess reserves) for now... but not for much longer.

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