The Foreclosure Rate is Higher Than You Think

Karl Denninger at The Market Ticker has some (more) bad news for American taxpayers:

An enormous number of banks are holding loans at or close to “par” that really aren’t. They’re holding mortgages at massively-inflated values, even on defaulted properties, and this is why you are not seeing more foreclosure sales – that is, why inventory is being held back. If they sell it the accountants will force recognition of the loss, which will render them instantly insolvent, but so long as they “extend and pretend” they are marking these loans way, way above recovery value. The upshot of this is that these firms’ balance sheet claims on asset values are massively inflated, regulators know it, and they’re intentionally ignoring it.

Karl is basing these statements on comparative analyses of the total loss rates of banks placed into receivership by the FDIC and the asset values on the banks books before the FDIC took action.

So what do we know?

• The economy is in worse shape than anyone realizes.
• The banks are hiding their losses to avoid being thrown into receivership.
• The FDIC is failing to take action against these banks, because the Obama administration doesn’t want anyone to know how bad the economy really is.

This “recession” is far from over — it’s just barely getting started.  The current bull market is a suckers game — knowledgeable insiders are selling thirty times more shares than they are buying.  The smart money is getting out of the market before the next crash.  With unemployment about to hit 10% and enormous government debts to pay off, there is simply no way for this economy to have a real recovery in 2009.

When the banks are finally forced to make a fair and honest accounting of the bad loans on their books, many of them will fail.  This failure is necessary before a real recovery can begin.  Unfortunately, the Obama administration is putting this off for purely political reasons.