Tags: christopher | Whalen | Foreclosure | Peak | Ahead | US

Whalen: Foreclosure Peak Still Ahead for US

By    |   Monday, 06 Dec 2010 02:12 PM

The foreclosure crisis will peak sometime next year, causing the economy to struggle to stay in positive territory, pressuring California and other states into default, and likely triggering the restructuring of an “insolvent” Bank of America, predicts banking analyst Christopher Whalen.

Whalen says that the data and discussions regarding earnings on bank conference calls lead him to believe that the housing problem is still very much ahead of us. One of the founders of Institutional Risk Analytics, Whalen just published a new book, “Inflated: How Money and Debt Built the American Dream.”

“It’s going to peak next year. We’re not nearly a third of the way through the backlog of foreclosures, in part because the banks, operationally, just couldn’t deal with it,” Whalen said.

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It takes a year for a foreclosed home to work its way through the entire legal process. That means much of the foreclosures making headlines now will not be completed until well into 2011 and perhaps 2012, Whalen said.

Major banks are just now talking about how to add operational capacity to handle the work to come, he said.

“My big concern is that by next year most of the home sales in the United States are going to be involuntary, they’re going to be the result of foreclosures,” Whalen said. “This is going to pull down all the comparable prices for homes that are still performing.”

If that happens, expect the impact on property-tax collection to exacerbate the risk of default among major states, including California, New York, and Illinois.

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State spending on pensions and other mandates is going up while revenues are going down or are flat, Whalen said. Sales taxes and property taxes are the two major sources of revenue for a state like California.

“What if we have a down economy next year and we have down real-estate prices? I think you’re going to see a situation where the accumulation of foreclosures is going to start hurting property-tax revenues for cities and counties, and that is going to just snowball,” Whalen said.

As a result of slowing growth and problems like delayed property-tax payments, coupled with a lack of political will to cut spending, Whalen expects a series of sovereign defaults or near defaults in Europe and in the United States.

Whalen said that the United States is living through both inflation and deflation, where real growth isn't happening but prices are rising at the grocery store just the same.

“While we had nominal growth for the last 20 years, for example, we’re not keeping up in real terms,” Whalen said, that is, adjusted for inflation.

As long as foreclosures are a problem, it will be hard for the United States to post positive growth, Whalen said.

Meanwhile, thanks to the foreclosure problem on top of other liabilities, Bank of America is likely to be restructured, wiping out its bondholders, Whalen said.

“I think Bank of America is going to have to be restructured. I think the bondholders at Bank of America, specifically, are going to have to be compelled to convert into equity,” Whalen said.

Bank of America has told the United States that is has completed repayment of its $45 billion bailout under the much-maligned TARP program, reports the Financial Times.

The bank said it was able to raise $3 billion in capital through asset sales, the newspaper reported.

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The foreclosure crisis will peak sometime next year, causing the economy to struggle to stay in positive territory, pressuring California and other states into default, and likely triggering the restructuring of an insolvent Bank of America, predicts banking analyst...
christopher,Whalen,Foreclosure,Peak,Ahead,US
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2010-12-06
Monday, 06 Dec 2010 02:12 PM
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