A Phantom Reality

Consider our current mortgage crisis. There could be 4 million foreclosures in the U.S. this year. More than 15 million homes are currently worth less than their mortgages. So why aren’t banks doing more to modify loans before the next bottom hits? Even with government incentives—$1000 per loan modification—a mere 131,000 loans have been modified in recent months. The administration has called the nation’s top 25 mortgage servicers on the carpet—a meeting is set for July 28—to push them toward giving home owners the relief they need. Regardless of your politics, millions of home owners are in trouble and according to many economic experts real recovery won’t begin until the foreclosures stop. So why aren’t banks modifying more loans? Because the write-downs associated with loan modifications hurt the balance sheet. At the moment, most banks are working hard to show new profitability and repay government bailout money. But how? By showing that their loan portfolios are healthy, even when the coming foreclosures will eventually cost banks, and ultimately the economy, significant grief.

Pretending to believe that their loan portfolios are in good shape, and refusing to take the needed action now, reflects the Phantom Reality the banks are under. A Phantom Reality is an inaccurate description of how things really are. It is a reality that people talk about and describe, but does not really exist—although everyone acts like it does. In the case of loan portfolios, the coming foreclosures will cost more money than the loan modification write-down; but not in the short term—foreclosures can take up to 18 months. Some call it an extend and pretend policy.

When operating under the assumptions of a Phantom Reality, your inaccurate view of “how things really are” can cause you to make wrong decisions, solve wrong problems, and move in wrong directions. Phantom Real¬ities frequently lead to wasted time and effort and almost always impede people from achieving the desired result. Unfortunately, that seems to be what our banks and mortgage lenders have been doing and continue to do. Their reality is a Phantom Reality.

Hopefully, there will be a serious accountability conversation on July 28 between the administration and the nation’s top 25 mortgage servicers—one that will stimulate and inspire America’s banks to stop pretending that their balance sheets are strong when they aren’t and start modifying loans for millions of home owners—stemming the next wave of bad news for the economy and the crippling effects that foreclosures will have on everyone.