The Naked Capitalism blog posted something interesting yesterday that got me thinking…

Are Banks Afraid to Foreclose on the Rich?

I got this report from an attorney who is doing work in one of the top five foreclosure states.

One of his colleagues has a monthly mortgage payment considerably above $20,000 a month. He has not made a single payment in over 18 months. He has also not received a foreclosure notice or even as much as a call from his servicer.

He knows of 20 people personally in his community who have mortgages of over $20,000 a month who have not made a payment in over a year. As with his case, there has not been a peep from the bank about the failure to pay.

My misanthropic mind can devise several speculative conspiratorial scenarios, but to think like a banker — with my (over-leveraged) balance sheet — I would argue it pays to be more pragmatic and think with a bottom line centric agenda.

So perhaps the best answer comes from the analysis of Chris Whalen:

When does this thing [foreclosure mess] get bad? It’s this time [December 2011] next year. Why?

(note: foreclosure numbers will be higher in 2011 than 2010.)

It’s just the flow of foreclosures moving through the system. When you have two-thirds of all home sales in this country involuntary, in other words, coming out of a foreclosure, where the bank hires a Realtor and says “Sell The Property Now! Get a Bid“, that’s going to pull all the comps for all the homes in the United States down.

In other words… forced mark to market accounting.

This will be the day of reckoning, monetarily speaking. When home prices go from a figment of balance sheet alchemy to present day reality values, many of the banks, steadily being converted into REITs, will be forced to find their way out of a painted in corner.

But, should rampant foreclosures force mark to market accounting, which the Too Big To Fail banks have done everything in their power to avoid by diluting the accountability of the Financial Accounting Standards Board (FASB), it will be look out below for the housing market. It could also be the final catalyst for home prices to fall back to the historical trendline.

Big picture wise, it’s a sad state of affairs when magical accounting gimmicks and delusions of home values past mask free market economics all for the sake of psychological warfare investor confidence.