Arizona Real Estate Notebook

The price mechanism for mortgages is broken because banks don’t have to book their real estate losses until they foreclose.

Homeowners have already taken HUGE hits in their home asset values but the economic adjustment is stalled there because the banks haven’t adjusted the value of their underlying mortgage loans.

Those pretend real estate values on the bank books distort economic decision making throughout the system preventing the economic adjustments that need to be made.

Until those underlying mortgage values are priced close to their real economic value the economy will be adjusting slowing instead of growing rapidly.

The banks’ strategy is apparently to adjust a few percentage points of their loans through foreclosure each year for many more years to come until, eventually, the book value equals the real economic value of those real estate mortgage assets. After that, the economy can start making decisions based on economic reality instead of having the banks fight economic reality every step of the way.

The U.S. economic policy is now entirely structured to create a soft landing for the too-big-to-fail banks because they have somehow convinced everyone that they are the most important part of the U.S. economy.

The conclusion is that given the enormous economic and political power of the too-big-to-fail banks, we’re in a for a very slow economic adjustment with the banks calling the shots.