What gives?

In San Diego, defaults are up, but foreclosures (NOTs, Notices of Trustee Sale) are down.

It's not just a local phenomenon. Countrywide, Countrywide is posting skyrocketing delinquencies but their REOs for sale are slowly declining.

What's going on here? Some think it's just a statistical blip before foreclosures pick up steam again. I think something bigger is at work. Lenders either can't handle the volume of foreclosures, or don't want to foreclose. I suspect a bit of each.

Lenders' back offices have never seen foreclosure volumes like this. They are overwhelmed. But they also probably do not want to foreclose. Politicians from both sides of the aisle have been proposing a massive taxpayer bailout of bad lenders. John McCain's plan is to have lenders take the a writedown only to "current market value" (likely on a rosy appraisal) and then have taxpayers eat the entire loss on any further declines (which may be huge as many forecasters are predicting double-digit additional declines). If I were a lender, I'd wait for McCain's bailout rather than foreclosing and trying to dump inventory into an already flooded market.

What's a borrower to do? If your loan balance exceeds your home's value, stop paying your mortgage immediately. Remember, in the Bernanke/Pelosi/McCain world, the responsible get screwed, and the reckless get rewarded. If you stop paying your mortgage, your bank will either voluntary renegotiate the terms, or Congress will force them to do it. If you keep paying on an underwater house, you're just throwing good money after bad.

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I talk a lot about inflation. But today was the first time in my life I actually used a dollar bill as toilet paper.