Pretend and Extend
While channel surfing a few nights ago, I caught the tail end of PBS "Need to Know" with host Alison Stewart. Her guest was Elizabeth Warren, and the conversation I walked in on had to do with "Extend and Pretend." I've never heard of: Pretend and Extend.
Realizing they weren't discussing VIAGRA, I paused to listen.
Oh how the saying "ignorance is bliss" didn't ring true! Sometimes I wish I could bury my head in the sand!
And speaking of ringing . . . Elizabeth Warren rang the hand-bell of caution. As in the days of yore . . . and yes, I did just say that . . . where the town crier would shout "Oyez, Oyez, Oyez . . ." to grab the populaces' attention, Elizabeth was sounding the bell. I think she was saying "Oy vey, Oy vey . . ." however.
Elizabeth Warren and the American Holding Company PBS Need to Know
Pretend and extend is something that commercial lenders are doing with their loans. To make them look good on the books, they will "extend" the existing mortgage so the Mortgagor will continuing paying the Mortgagee. However, the value of the property is the original . . . not the diminished value, or the current market value.
"ELIZABETH WARREN:
Quite frankly, we are going to see some of that. See-through buildings, where the building has already been built, but there are no tenants in it, so you can see from one set of windows all the way over to the other. There will be some of that. There will also be some other adjustments that will be made.
In some cases the mortgage lender will repossess the property and is able to sell it to someone else and get it off their books. Another possibility that in some ways is far more troubling is that the financial institution will say, "Oh, we think maybe that property is, um, maybe still worth $2 million. After all, you're making your payments, and so how about if you, the borrower, and we, the lender, hold hands and pretend-"
ALISON STEWART:
Is this Extend and Pretend?
ELIZABETH WARREN:
This is Extend and Pretend, that's exactly right. What it really means is we will pretend that this property is still valued where it was back in boom times, and we will simply extend your outstanding mortgage on this property so that you keep paying.
In other words, the loan appears to all the world on the books at a high value and fully performing, when the underlying economic reality is that it's worth a whole lot less, and the odds that it will end up in collapse and default, ultimately in foreclosure, are very high.
ALISON STEWART:
Isn't the idea, though, to give people more time? To give these institutions more time to come up with the money, perhaps hope against hope the economy gets better?
ELIZABETH WARREN:
Well, that's the question. And you just put it in the right word, it's hope against hope. Here's a problem with it, the longer you pretend, the longer it takes to get the market back to where supply and demand match each other.
The longer it takes to get the right price back on the commercial real estate, attract in the businesses, get the rents in the right place, and get this economy back up and booming." (Toward the bottom of the transcript)
While they were discussing Commercial properties, quite a few of the loan product that was placed in the Residential arena came from Commercial. ARM's, for example, had their beginning in the Commercial real estate world. It wasn't long before they found their way into the Residential marketplace.
This is a great tie-in article, and I suggest you take some time to read it: To Fix Sour Property Deals, Lenders Extend and Pretend
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Pretend nothing is wrong....long enough....and nothing will be, I guess.
The banksters are all nuts.