It seems like every quarter the banks have to write down more than they "expected", so there's still taking a hit on their previous investment decisions. That would argue that they haven't written down the stuff too much yet.

When, in some areas, 52% of home sales are houses that have been foreclosed - http://www.calculate...es-now-52-of.html - the market isn't normal. That decimates the value of good homes with good mortgages. So, even if a bank doesn't have sub-prime mortgages, and even if they did their job properly, they can still take a tremendous hit if the market in their area has been hit.

Some expect an additional ~ 30% fall in home prices this year - http://www.calculate...ome-builders.html

There doesn't seem to be an incentive in Geithner's plan for the banks to actually clean up their books. They can't get face value for their loans, because the market as a whole is still falling in most places, and their incentive is to dump stuff that is worthless for high prices, but who would buy it? Without some stick behind the plan (which I understand the "stress test" is supposed to be, but we'll see), it doesn't look like it's going to work.

Time will tell, though.

Cheers,
Scott.

Ultimately, what a loan is worth is tied to the property market. If home prices are dropping too much, or if foreclosures make up much of the market, then the loan value is going to be impacted. (People aren't going to pay on a $500k mortgage in a $250k neighborhood very long.)

http://www.calculate...able-all-day.html

Cheers,
Scott.

Apparently houses used to be priced around 2x average annual salaries. Of course, one would exclude areas like SF and NYC, but even then if that were taken as what houses "should" be priced at, then they would still have to fall a lot. Perhaps scaling for increases in average square footage makes sense, but I don't think it would make a huge difference. Over the long term, housing should track real wages.

Another way to look at the prices is here (which covers up to 2006):

http://graphics8.nyt..._graph2.large.gif

Clearly, there was a huge bubble...

Ultimately, houses are worth what people will pay for them. If the prices drop far enough, the market will pick up. Until then, the true value is just a guess. But, at the micro level, it's clear that many many houses have become worthless (or nearly so) in areas that were subject to speculation - http://www.calculate...f-peak-price.html

Cheers,
Scott.