I don’t know about you but I sure am glad this recession has “bottomed out” and we’re beginning to see the “green shoots” of recovery - “just around the corner,” or “coming into focus,” or - my favorite - “the light at the end of the tunnel.”
Of course, even the administration admits this doesn’t mean squat if you’ve been laid off and can’t find a job. This will be another one of those “jobless recoveries” which is perhaps the most confusing term ever invented by political economists. How can there be “recovery” if the unemployment rate comes down slower than a three toed sloth making its way to the ground looking for breakfast? (Check it out: The cute little bugger takes a full minute to climb down about 15 feet. Anyway, I LIKE the analogy.)
I guess they mean that if you’re lucky enough to have a little cash, bargain basement stocks and other investment products are great buys and people can start “recovering” all that money they lost during the recession - except if you own a home.
No jobs but the rich get richer. Some recovery.
Speaking of homes, have I got good news for all you Cassandras out there. There are a staggering number of people who are about to lose their homes over the next year or two. Tim Cavanaugh of Hit and Run has enough bad news to keep our gloom and doom punditocracy busy for weeks:
• A record 7.58 percent of U.S. homeowners with mortgages were at least 30 days late on payments in August, says Equifax, up from 7.32 percent in July. Delinquencies are not only rising from month to month, but rising at a faster pace. More than 41 percent of subprime mortgages are delinquent. (That’s quite an increase from 2007, when I took heart from the fact that only 10 percent of subprime mortgages were in default. But, well, at least the glass is still more than half full, right?)
• About 1.2 million loans out there are in limbo: The borrower is in serious default yet the bank has not started the foreclosure process. Another 1.5 million are in early stages of the foreclosure process but the bank hasn’t yet taken possession of the home. Counting these and loans that are highly likely to end up in default, one analyst estimates three million to four million foreclosed homes will come on the market over the next few years. And don’t believe the freshwater economists when they tell you there’s no such thing as a free lunch: Some 217,000 Americans have not made a mortgage payment in one full calendar year, but their lenders have yet to begin the foreclosure process.
• Option ARM recasts (not resets, as Calculated Risk explains) are as much of a time bomb as ever, with nearly all borrowers in this class making only minimum payments and negatively amortizing their mortgages.
• Something called the National Consumer Law Center criticizes state mortgage-mediation schemes as well as the Obama Administration’s Home Affordable Modification Program, which at last count had managed to prevent 235,247 homes from coming onto the market. However, data from the Federal Reserve and the Office of the Comptroller of the Currency indicate that even when these programs succeed, about half of all the renegotiated loans end up back in default soon afterward.
The subprime loan mess is still with us. If anything, it’s worse. Those balloon payments attached to Adjustable Rate Mortgages will continue to wreak havoc on borrowers caught holding on to a house they can’t sell or borrow against. And Obama’s home mortgage program is worse than a dud - it is actually going to contribute to Meltdown II in a big way.
By the way, did it really cost $75 billion to bail out 235,000 consumers? I’ve got no head for math but that seems to be a huge amount of money to help such a relative few - especially since by my very rough calculations it works out to about $32,000 per consumer bailout. (If that’s wrong, I will use as an excuse that I slept through Sister Mary Conception’s class where we learned long division.) Speaking for myself, that would be equivalent to about 3 years worth of my mortgage payments. I’m sure it’s just because I’m an economic dunce and can’t figure it out but my impression was that the program was supposed to help borrowers who were in serious arrears with their loan to get their head back above water.
And what’s with this 50% failure rate? Somebody please convince me that we didn’t just pour $75 billion down a black hole?
Another thing apparent from those numbers is that some banks are in a really, really precarious position. Many of them may already have too many repossessed properties that have been foreclosed - else why the long delay in starting foreclosure proceedings? Unless we believe that bankers have developed a conscience and a soul to go along with it (just kidding Larry), this could indicate that for some banks at least, the bad paper is becoming very worrisome and rather than take another almost worthless property, they are allowing homeowners to slide in their mortgage payments.
Community focused banks may indeed be bending over backward with their customers, taking partial payments from borrowers until they get back on their feet. But I find it incredible that more than 200,000 people haven’t paid a dime on their mortgage in a year and still have a home. Eventually, I will bet you dollars to donuts that we, the taxpayer, end up bailing them out anyway.
Cavanaugh explains why Obama’s consumer mortgage program had it all wrong to begin with:
[T]he renegotiation has made things worse for everybody. The lender ends up with lower payments in the short term and then has to foreclose on a less-valuable property at some point in the future. The borrower gets no financial upside and (though he or she gets the use of a subsidized domicile for some period of time) is encouraged to stay in a losing situation when immediate foreclosure would have been a more merciful option. Prospective buyers get locked out as dumb lenders, deadbeat borrowers and the government all collude to keep the price of the house artificially inflated. And taxpayers have to spend $75 billion (the budget of HUD’s Making Home Affordable program) for the privilege of making it all happen. The best option for all concerned would be to get the deadbeat out of the house as quickly as possible, but nobody is doing that.
What precipitated the first crisis was an avalanche of foreclosures that caused the bottom to fall out of the new and resale home market. This made the mortgage backed securities and other instruments like derivatives held by the big banks and firms like AIG lose an enormous amount of value. Could history be repeating itself.
Put it all together, and throw in mainstream media outlets that as recently as June were calling for mortgage haircuts specifically to allow people to keep borrowing against their houses, and you’ve got the mother of all perfect storms mixed with the crack cocaine of third rails on steroids. The foreclosure wave may seem all tired and 2008, but it’s hotter than ever.
I’m no economist but it seems to me a possibility that another hair on fire, full blown crisis could come again. Home values are so depressed today that it would be a stretch to think their value could plummet much farther. But that many foreclosures might cause a lot of trouble for smaller banks, regional banks, and perhaps even Fannie Mae (FHA is already in trouble and may need a taxpayer bailout).
But then there is the 800 lb gorilla in the room; the commercial real estate market. The Wall Street Journal had an article back in December that predicted from 10-26% of all retail businesses going bankrupt. That’s an awful lot of empty store fronts, and malls. And the market is incredibly depressed for new office and industrial properties (see this video to get an idea of the problem).
I guess the point I’m trying to make is we are not out of the woods - not by a long shot.
UPDATE: LIKE I SAID - NO HEAD FOR MATH
John in the comments very gently points out that my math on how much each of the 235,000 consumers taking part in Obama’s home mortgage bailout received from the $75 billion program was not $32,000. I was only off by a factor of 10.
The correct number is $320,000.
Now will someone explain that to me? I know there’s a rational explanation - maybe the program is still ongoing and they haven’t given out that much money. Couldn’t find that info at the HUD website so if anyone has a clue, let me in on it.