A great article by the Economist says, in part, “If you put all that together, it is easy to see why an economy burdened by debt and a housing bust is in extra danger. Starved of funds and facing not just losses but lawsuits (see article), the banks are hoarding liquidity and capital. That can create a vicious circle. As the system of leverage that magnified credit collapses in on itself, borrowing becomes harder and demand falters. The rot can spread from housing to other areas, such as commercial property and credit-card debt. If the money-market funds then withdraw even more of their longer-term lending from the banks, then banks will need to conserve yet more capital. And so it goes dismally on.”
Many of you may have seen a recent episode of Boston Legal in which Clarence was about to lose his home through foreclosure. The dialoge implied that banks will not prepared to own houses which house prices are falling. Homeowners are not prepared for foreclosure and would prefer to prevent it. On the other hand so-called “teaser rates” are resetting. I recommend reading the entire article from the Economist so you can draw your own conclusions.