I have a theory. It may be a fallacy. I may have conjured it up. But it’s what I believe.

You may have heard that last week the biggest U.S. lender, Bank of America, stopped foreclosing on homes where the mortgage was in default. JP Morgan Chase and Ally Financial had already stopped foreclosing in some states.

The foreclosures are being stopped as attorney generals in some states are investigating whether the foreclosures (principally the paperwork that goes with the foreclosures) are being done correctly.

My belief is that the banks are looking for any excuse to stop the foreclosures — they don’t want to own anymore houses anyway! They have too many homes on their books already! What the heck are the banks going to do with all these homes anyway?

The concept is quite simple. If the borrower cannot make his/her payments on the mortgage, the bank takes back the home they lent the money on. You can say the paperwork is not 100% accurate, but the fact that the borrower is not paying his/her mortgage is 100% accurate. Banks had already slowed down the foreclosure process considerably. Now they’ve found an excuse to just stop taking the houses back.

Over four million homes in the U.S. are either in the foreclosure process or are three months late on their payments for their mortgages. Lenders already foreclosed on more than one million homes in 2009. In August of this year, they foreclosed on 95,364 homes, and the estimate for total 2010 foreclosure was another one million homes.

The bottom line is that the banks cannot foreclose on homes fast enough; they cannot turn around and put them on the market fast enough at lower prices for those credit-worthy Americans left who can buy them, and they simply can’t sell them fast enough to bring cash in.

A welcome breather…a temporary stop to the foreclosures.

Could this actually turn out to be a good thing for the real estate market? Fewer homes for the bargain hunters to pick from might be just want the market needed. The new homebuilder stocks love the concept. Since the news story of the Bank of America extending its freeze on foreclosures in all 50 states broke last Friday, the stocks of the largest U.S. homebuilders have been rallying.

Michael’s Personal Notes:

The worse-kept secret on Wall Street these days has to be the second round of Quantitative Easing (QE2) expected from the Fed. QE2 will come in the form of a second round of the Federal Reserve buying bonds. I have a big problem with this concept. Where does the Fed get the money to buy the bonds? I assume it prints it.

But it is not just the next round of QE I’m against. Much of the financial stimulus the government lathered upon Wall Street and the economy has been a waste. The government saved the big banks by pumping them full of cash. These same banks have been reluctant to lend money out. In fact, most, if not all, of the banks have tightened their lending criteria. But, in the meantime, big bank employee bonuses this year will be at record levels again.

Remember the 2009 American Recovery and Investment Act?  It was authorized to send one-time payments of $250.00 each to about 52 million Americans. A recent investigation found that 18.0 million dollars of those checks went to dead people. Another $4.0 million went to 17,000 prisoners who were not eligible to receive the money. An example of government waste and mismanagement at its finest.

As a taxpayer, I must have missed the part in the Constitution and Charter of Rights that said my taxes could be used by the government to invest in private corporations. But isn’t that what happened with my money when the government bought shares in General Motors? Or lent money to AIG? Or backstopped the Bear Sterns acquisition? My hard-earned money went to bail out others who had mismanaged their companies.

Where the Market Stands:

The yields on U.S. Treasuries continue to decline, while the yields on stocks rise. Two weeks ago, a 30-day U.S. T-bill yielded 0.15%; today it yields only 0.11%. Even the mid-term Treasuries are yielding less. Five-year T-bills pay only 1.10% today, compared to 1.26% two weeks ago.

Not happy with the pathetic yields on Treasuries and the bubble brewing in the bond market, investors are moving back into stocks. The price/earnings multiple for the Dow Jones is inching closer to 15, up from 14.7 two weeks ago. Simply, the stock market is moving higher, as investors are buying stocks again.

The Dow Jones Industrial Average opens this morning up 5.7% for 2010. Add in its 2.6% dividend yield and we are looking at a respectable return of 8.3% for stocks so far this year. Not a huge return, but a respectable return on investment given the prevailing interest rate environment and the economic concern.

I continue to believe that the bear market rally that started in March of 2009 remains in force.

What He Said:

“The proof the party is over in the U.S. housing market could not be clearer to me. The price action of the new-home-builder stocks is telling the true story — these stocks are falling in price daily (and the media is not picking it up). Those that will hurt most when the air is finally let out of the housing market balloon will be those buyers that bought in late 2005. In fact, the latecomers to the U.S. housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in PROFIT CONFIDENTIAL, March 1, 2006. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

Tags: home foreclosures, real estate market, stopping foreclosures, Today's Profit Confidential, U.S. lenders, U.S. real estate market