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Guest Post: America's Stealth Stimulus Plan: Allowing its Home "Owners" to be Deadbeats
Submitted by TraderMark of Fund My Mutual Fund
I was looking through the avalanche of economic data today, and it struck me how once again Americans are spending well over their income growth. I thought to myself, well part of this are all the programs where the American government is subsidizing consumption. In fact we're at the point one of every six dollars of consumption are from goverment, meaning you only need to "earn" 5/6ths of your spending power. [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929]
But something else hit me... I've written about this in the past in conceptual terms but never put it into an analysis. The true stealth stimulus plan in America is letting so many of its people live "rent free" as they sit in defaulted homes not making a mortgage payment. This "cost savings" allows them to shop and spend, and otherwise support the American consumption society. While it is hard to keep track of all the stimuli, try to think back to the Bush spring 2008 stimulus. (that was about 37 stimuli ago) That goosed GDP quite well for two quarters. But we now have a quasi permanent stimulus plan that goes on quarter, after quarter, year after year.... and its equivalent to have a permanent Bush level stimulus (using VERY conservative figures).
Let's look at this from a more analytical eye.
1) The number of households in America is approximately 111,000,000 (111 million)
The home ownership rate, after peaking near 70% (the long term trend was 65%ish but we've tried every trick in the book the past decade to get another 5% into the "ownership society), currently it sits under 68%. I will use 67.5%
That means 111M x 67.5% = 75M households in America "own" a home.
2) We saw just last week that more homes in the US were in deliquency or foreclosure, than there are for sale - about 9.6% in delinquency and 4.5% in foreclosure. So 14.1% of home "owners" are living "rent free" - i.e. freeing them from a home payment. Of course some of these people are in dire circumstances so let's not be too flippant about it, but others have chosen to make a calculated decision to walk away from underwater homes and until the banks show up to take the house back they have no housing payment.
So of the 75M households in America owning a home, about 14% are not making a payment.
That means 10.5M households in America are living in a shelter where they either can not, or choose not to make a mortgage payment.
3) Now comes the tricky part, trying to figure out the average note payment. I truly have no idea so let's make an educated guess. The median value of a home in America is roughly $170K, and the average loan to value is about 70%.
About 1/3rd of American homes are owned free and clear of a mortgage meaning the other 2/3rds have notes to pay. Obviously those who are not making payments fall into the 2/3rds category. Hence if we exclude the 1/3rd of Americans who owe nothing on their mortgage, the remaining 2/3rds have a much higher loan to value than 70%. Is it 80%? 90%? No idea... it really makes little difference in our analysis.*
On a $170K home owing 90% means a $153K mortgage, whereas owing 80% means a $136K mortgage. Reasonable people would agree the average owed by the 2/3rds who have not paid off their note would be somewhere in that range.
Next we have to back into some sort of monthly mortgage payment; just looking through some ammortization tables, and realizing some people have bad credit, some average, some good on a $145Kish type of median US mortgage the monthly payment is probably somewhere near $1200-$1300. I am excluding property taxes from this analysis which is another cost that people are avoiding - which is why my numbers are going to be conservative.
So excluding property taxes let's say the average person's mortgage payment is $1250.
Going back to point 2, 10.5M Americans are skipping out on their payments. At a monthly payment of $1250 that is a monthly "stimulus" to the economy due to "not paying a mortgage" of $13.1 Billion.
Annualized that is just under $160 Billion a year of "stimulus" to the US economy via deadbeats; i.e. the Bush 2008 rebate happening quarter after quarter, year after year. Again, I contened the real number is higher than that as property taxes are not included. If I increase the monthly payment "avoided" by $250 (to account for property taxes) we get very close to $200B of extra money flowing through the US economy that should be going to pay for a roof over one's head.
*note: if you disagree with my conclusion on the average LTV level, or average mortgage payment that is fine. Simply plug in whatever you think the average mortgage payment is in America and multiply it by 10.5 million households for the monthly figure. I don't think a $1250 mortgage payment is atypical in America, in fact I might be understating it.
**************************
Now obviously in a 6-24 month period it is not the same people who enjoy this stimulus. Some finally are kicked out of their homes, while other new 30+, 90+, 120+ day late borrowers take their place. So it's a "rolling" stimulus if you will, relatively stable in terms of absolute dollars but rolling from 1 household to another as they go through the stages of default.
With the changes in accounting rules earlier in 2009 that allow "mark to myth" rather than mark to market, there is little incentive for banks to foreclose quickly, so instead of the pre2007 timeline to kick people out of foreclosed homes there are many anecdotal stories of people living "rent free" for 14, 16 months (if not longer). Plus of course all the mortgage modifications, many of which fall right back into default 6-12 months later... further kicking the can, and extending how long this stimulus can last (perhaps into 2012 if we really do "things right")
So on top of the "sacrifice our grandchildren's standard of living stimulus" (spent $1T+ of money to manipulate interest rates downward so people can refiannce at lower rates) we have a stimulus no one is talking about.... the Deadbeat Stimulus. So as we smugly cheer how American seem to yet again be able to spend more than they earn, let's clap for our neighbors who once again have "figured out the system". Those of out there paying their mortgage (like I do)... well, we're the suckers in the system.
Now if we could only figure out a similar scheme for the renters of America (the other 37.5% of households) we could really get this economy screaming upward into a rampant recovery.
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Friend, a lot of your math is a mess. I agree with your point though.
Hi Ms.
Would love to know which part of the math you find messy. The # of households in America is straightforward as are the default and delinquent figures released last week.
The only variable is average mortgage note in America.... I don't think $1250 is egregious.
Those are really the only 3 numbers that matter.
Hi Trader Mark!
The starting point looks off:
Just because you are in foreclosure does not mean you are living there. In addition, some delinquent folks leave and it does not go into foreclosure for a long time, just sits vacant. Adding the numbers together does not do it for me as the number who are living rent free.
Thus this number
does not get it for me. It carries through the rest of the math.
In addition, this article which claims that 1/4 of all borrowers are under water, has some interesting stats that bring up other issues like "from when to when" are we talking about? There are no bounds on these numbers. I may not be saying this well but it seems to be that the units of analysis do not all come from the same universe if we do not have a time period bracketing the analysis. I think the author tries to allude to this at the end of the post, but I don't think it is done clearly enough. Thus the analysis become slippery for my taste.
http://online.wsj.com/article/SB125903489722661849.html?mod=rss_Today
This does not negate the point that some folks are defaulting and putting their money into the economy. There are other angles of this that remain undeveloped in the post. It does not mention the idea that some default, then rent for less, or buy a new house before defaulting, and thus put more money into the economy than if they stayed in their underwater home. But then this would be a percentage of that n that was developed (old mortgage - new rent), not the whole number.
For all these reasons, the math is just too "by-the-seat-of-the-pants for my taste. I think the situation, again the author tried to allude to this, is too much in flux to get a genuine analysis beyond the initial observation. Furthermore, I think it is not a planned stimulus, but an accidental bi-product of the ongoing thievery.
Thanks for asking. If I am wrong, let me know.
Thanks for expanding on the thoughts. Good points - but I would ask you why would you leave a shelter that is in foreclosure or default if no one is bothering you to move?
You have rent free living quarters... unless you believe it is morally wrong it would make economic sense to stay. Heck you could pack up all your belongings and then have ti ready once the sheriff knocks.
But I get where you are coming from that not everyone delinquent or in default is living in the home. Let's knock off $20B from my number, and then add back $20B for the taxes these people no longer have to pay.
I don't think it was necessarily 'planned' but a 'happy by product' ;)
Even if the figure is HALF of what i say, its akin to 20 cash for clunker programs.
Regarding this:
I think this is changing but folks I have known in the past have been afraid of getting in trouble (police and other authorities). They leave in the dead of night when no one is watching because they are ashamed. I think the lower you are on the SES scale, the less likely you are to see walking away as an "informed economic decision." You just see it as "getting in trouble" or a kind of dishonesty. Shame weighs heavily on the soul and provokes what you would consider irrational conduct.
i see your shame and raise it one helping of good ol' christian guilt.
of course those people have a way to assuage their moral hazard, american style...remember it's xmas time and what a better way to wash away your sins than to buy your family (the extension of yourself) glorious gifts? especially when the hidden message in the conventional zeitgeist is that the consumer will lead the world out of recession (which means their house will magically rise in value again).
remember, even if one is balance sheet red, does not mean that one is necessarily cash poor (e.g. zombie banks). we are living in tele-timmy-land and tiny tim is the patron saint.
it wouldn't surprise me in the least that some of these 2nd/3rd homes that are in default-not-default have new short-term renters for extra cash flows.
never underestimate the power of the manipulation of the economic/ethical dynamic, especially in those whose souls are already underwater, desperately clinging to the shore.
case in point:
"The nation's shoppers took advantage of deals on toys and TVs with some renewed vigor in stores and online on Black Friday after a year of concentrating their spending on basic necessities.
Though the first numbers won't be available until Saturday, early reports indicated bigger crowds than last year, with people buying more and even throwing in some items for themselves."
http://www.google.com/hostednews/ap/article/ALeqM5gGgpkfT6KVm99QZPDHhIzk...
Hi Tip e.
Not everyone. Years ago I tried to get my family to tone down the Christmas thing. Did not go over well, I was booed and ignored. I requested handmade/baked gifts so at least they could be spared expense (and hassle). This year, I got an email from one of the adult step-kids asking if we could draw names and do a $50.00 limit. They all are planning it with each other. They want to do it now, on their own. This won't be in the news.
To keep it on topic, one of these folks sold her house, took her profit, and is now renting dirt cheap and back in grad school. She left her corporate job because, while she was good at it (they have told her she can come back), she did not feel like she was helping people, but always under pressure to "get over on them." It was making her sad.
I bet some of the changes in my family are going on elsewhere. But we won't see them on TV.
Peace Tip e.
Another thing about your post, I wonder if all we are seeing here is a kind of pulling demand from the future, like cash for clunkers did in a way. Have big sales, big "events" and then the rest of the season falls flat. We shall see.
funny, i was on the NJtransit overlooking manhattan today, thinking something similar, that the whole schtick was about pulling income forward and pushing losses away, in order to control the slo-mo demo in progress. of course, in a zero-sum game, there's always the other side of the trade yes?
and yes, i agree, there is something happening in america that is still underneath the surface. something authentic, bubbling below, far beneath all the toxic crap bombs being dropped from up above. methinks it's best it stays secret for now, so the pols don't get their dirty hands on it before it ripens properly.
peace to u darlin
1st hand account of black friday from our amigo roboT:
http://wallstreetbear.com/board/view.php?topic=63622&post=213236
Do you know if the delinquency numbers that you have quoted are relative to the percent of mortgages outstanding?
Otherwise, if you are appplying those percentages to all of ownership you would be incorrectly including those homeowners that completely own their home.
Granted, sh. did hit the fan in the past few years, but as of 2001 you do need to remember that nearly 40% of people owned their homes free and clear.
http://www.census.gov/prod/2005pubs/censr-27.pdf
In addition, you should also at least pay a bit of heed to prevalent home ownership rates by state when attempting sketchy math as this:
http://4.bp.blogspot.com/_KU_qLvOMe_s/Rtsa9f6hzLI/AAAAAAAAAHY/_fIbeguOHc...
Just a couple of thoughts...
Brilliant analysis. Don't worry about renters. They're the leper caste of the ownership society.
Biggie, don't get me started....
Who shot ya, Pac?
While the AVERAGE renter is....
If i may so bold, sold very near the top and am renting with costs going down with each renewal/move. Do the math, am 'making money' by renting and waiting to 'strike' when $3M homes are $800k (which there are some like that now... or close to it). Add to that, they take my trash away, the plow the driveway, they fix the roof or plumbing it is has a problem.
Besides, am also waiting to see which country is the best to locate to as this mess unwinds.
You and me both, baby.
Plus, when the market does finally correct . . . and I keep foolishly believing that one day it will . . . you might be one of the few left with an 800+ credit score to take advantage. Of course, as time goes by and the real correction isn't allowed to happen, all the mortgage deadbeats increase their cash horde to compete with you . . . so maybe they will win after all. Don't ya just love crony capitalism/cut-throat socialism?
Seriously though, go read Mankiw's real estate piece from 89(?). His model predicted a 40% decline is residential real estate based on demography. Instead, we got the bubble. Why? Perhaps smarter people than I can opine, but if I remember correctly, Mankiw held the rate of home ownership constant at its historical norm. Subprime came in and changed this rate for "the better." But its on its way back down to its historic norm now, and all the FHA subprime in the world won't stop that from happening eventually. If there was something else wrong with Mankiw's model (Immigration? President Dobbs will take care of that), I don't recall it.
I expect another 25% decline in residential real estate over the next ten years, with a good chance most of it will be frontloaded into the next leg down.
Here's to renting!
I'm a renter too. I was being facetious above. Like you, I'm waiting for the market to correct but with all the intervention it looks like it will take a long time. I'm worried my cash hoard will be worthless by that time. I hope you're right about the front-loaded decline.
I think that the government should create a modification program for renters.
I would like to be able to move into a much better apartment than I can afford, and insist that the landlord lower my rent until I can afford to live there.
LOL, I've been renting the same apartment for 32 years now and my rent still ain't $800 yet. I can buy three houses for cash if I want to cause I have never paid a mortgage, repairs, property taxes, school taxes, water fees, gas, heat should I go on? I spend much time snowbird in Florida, LOL, $800 a month on a beachside condo down there too and the Caribbean a feww weeks a year. I'm happy to be the leper caste of the slave to his house owner society.
It's certainly a stimulus, but I think most people in real estate knew this was happening. The alternative was vacancy and destruction of the property and huge costs in policing evictions. In a real market, the lenders would lose "money" after they foreclose and have to mark to market at the auction and prices would come down. In a command mafiocracy, this misguided effort to keep the lenders afloat keeps the whole system in a zombie status. Just another pig in a poke for the suckers buying the paper...but I guess that's you and I on the hook since even the banks can't vend this potty scroll, so our bailouts are backing it.
i see one tiny problem with the idea of mortgage money as "stimulus" and that is:
This 'extra' $1250.00 per mo. that these people suddenly have ain't gonna get spent on flatscreens and the like, at least not for the most part. If these folks are that desperate, they're going to spend the money on things they already need to buy anyway, like food, clothing, gas for the car to get to work, pay the electric bill, and so on. In other words neccessities that they have to purchase anyway, so i see no real stimulus effect here.
+1 ... this article makes no sense.
No shit, the dumb ass needs take analyze the situation in the context of a fucking depression.
You think pointing out the stunning and unprecedented fact that millions of Americans are squatting in their own homes is senseless?
First of all it's a fucking travesty. Too many people in this country have lost their pride and sense of code about how to live life.
Secondly, and of huge imprtance here, is the property tax issue. As in: Who the hell is paying it? If the banks foreclose, they have to pay it. But, they aren't foreclosing on purpose. And, obviously the deadbeat residents aren't paying anything either. This is contributing to municipal collapse across the land.
In the end the Federal Government again will step in and aid the Municipalities. So the result is that deadbeat homeowners and corrupt banks who refuse to foreclose are again pounding the taxpayer.
That's why all this matters.
No the article does make sense, but it implies that everyone has this 1250 a month in cash and just aren't paying the mortgage. My guess is some have the 1250 and strategically aren't paying. Some have half. Some have nothing.
The biggest expense for 99% of people is housing and if you lower that cost (by letting people live for free) you do achieve a stimulus effect. But it isn't the same as handing them money. Another problem is a lot of bad mortgages recently reset to higher rates. The higher rate was never paid before so it isn't like not paying it adds money to the system.
Hi Lou
There are 2 broad categories of people sitting in unpaid homes.
Those who are forced into that condition by deteriorating finances
And those who see they are so far underwater, that they choose to send in jingle mail. Even though they have the means to make the payment. To wit, see this article from last week from WSJ which focuses on the latter.
http://online.wsj.com/article/SB125902556993561567.html?mod=article-outset-box#articleTabs%3Darticle
So for the latter category, I disagree 100% with your thought process. These are well off people who can pay the note but have decided as an economic decision it no longer makes sense and that money can be spent any way they wish.
The former group, those who are faltering as a condition of losing a job or whatnot - we can argue about. But let's take a real world example, your comment assumes a "yes" or "no" type of outcome. Meaning suddenly all that $1250 would be needed for necessities. In a real world example, people in this category are cutting corners elsewhere month by month, to make the mortgage payment. They are not, not buying food, clothing or gas... just less of it. Then once the mortgage payment is not an issue they can go back to their normalized usage of food, gas, or clothing... it is not as if that entire $1250 would have to go to these categories. Your comment would imply on April 2009 when the household is paying for a mortgage they have not paid for gas, food, clothing... but in May 2009 alle xtra monies suddenly went to necessities. That's a huge sum of money for most people in terms of a monthly budget... so one might argue PART of this money will go to necessities, but not all.
Frankly I believe it to be a moot point. As each economic report comes out and salutations to the "engine of American consumer" are rang, the question is not what they are spending ON but the fact they are somehow spending. My analysis was how is this happening and how is it being supported by lack of mortgage payments. If its on food items or flatscreen TVs does not matter to the point of the 70% of our economy that is consumer spending.
I can concede the latter category, i wasn't really commenting about them. However, having been in the former category myself some ten years ago, i can tell you from experience that when your income suddenly falls to zero, it won't be just PART of the money that goes to necessities, because it's not really 'extra' money at all. That's really where i make the distinction, because 'extra' it isn't.
Hi Lou
Keep in mind with 1 in 9 Americans (not households, but AMERICANS) now on food stamps and unemployment benefits now extended in excess of 1.5 years in many places, and close to 2 (possibly higher in certain high unemployment states) many of the "necessities" are subsidized otherwise. Probably quite different from your situation a decade ago.
I assume your unemployment was 6 months and you were not on food stamps, but I could be wrong. That also restricts the need to use the "mortgage money" for these items... the government is paying for them (at least partially if not fully) elsewhere.
Again, I am using a blunt force object analysis - we can quibble on the edge. Thanks for your comments.
TM,
yep, things were different for moi, self employed, no U/E comp. and no food stamps. At the time my living expenses for food, utilities, medical, transportation, etc., came to about $1400/mo. as best i can recall, while my mortgage was just under 1K. As you can see, i was still 'underwater' with the monthly bills even with that 'extra' money. That's why i say there really wasn't any money of a stimulus variety, and i suspect there probably isn't for a lot of these people today.
lou, i really think mark's theory is not based on the people who are struggling to survive, but rather those who can survive (afford the basic necessities) and are struggling to maintain their lifestyle as they know it.
look at the housing market: the low end is the only thing really moving, meaning most of those foreclosures-not-foreclosures are in the middle/high end of the market, yes? how many of those do you think are actual homes that their owners live in as their primary shelter and how many of them are investment properties?
i understand where you're coming from because you understand that this policy is actually helping some people stay afloat in their day-to-day life. and while i agree with you on the surface, as always as is needed in today's hyperreality, it always pays to look behind the curtain...especially when the TreasSec is precisely one of the individuals that mark is pointing his finger at.
There's a third category who are not paying their mortgage. For that matter they aren't paying their credit cards either. These are the folks that have the funds to payb but are so pissed off at the rampant Vampire Squidism in America, that they are not paying out of a sense of duty to not support the system that rewards criminal bankers with bailouts and sticks it on the taxpayer. These are the people who are sick and tired of seeing America deteriorate into a socialist/facist corporate state and are doing their best to starve the beast. They are sick of being told it's their moral obligation to fork their money over to those that are hell-bent on the destruction of America, those that have not an ounce of morals in their dark souls.
Further, these folks are not using the money from unpaid mortgages/credit cards to consume. Far from it. They are paying for necessity, not for consumer trash. These folks don't care if they ever take out a loan again, under the current system. These people are going off grid to every extent possible. I know people like this who quit paying almost a year ago, when BO, The Anointed One, took office and none of them have been floreclosed upon, yet.
So what you are saying is these friends of yours are so upset about the nation being morally bankrupt that they are choosing to be just as morally bankrupt for the sake proving a point? Hmmmm. I will consider myself lucky that I do not know such people.
Exactly. The article is mostly contorted blame-the-victim propaganda disguised behind trivial calculations. The float between non-performing loans and evictions is more of a boon to the banks, since they provide support for the property values, and the valuations they have on their books. Meanwhile, the money being 'gained' by not paying the mortgage has, in most cases, already been spent on something even more urgent, so 100% of that money was never really available.
That goes a long way to explaining why we aren't seeing the impact of decreased credit and increased payments on revolving charge accounts.
From one tax-paying, non-delinquent mortgage paying sucker to another - Happy Thanksgiving!
Here's a table with some mortgage data by state that's pretty interesting. You can sort the data by clicking on the column headings.
http://s.wsj.net/public/resources/documents/info-NEGATIVE_EQUITY_0911.ht...
According to this source, the average mortgage balance in the U.S. is just under $188K. But the strategic defaults are probably skewed toward states with the highest percentages of mortgages that exceed the current property value. The 5 highest on that are the 4 notorious bubble states (California, Florida, Arizona and Nevada) plus Michigan. California accounts for 14.6% of mortgages in the U.S. but 22.6% of underwater mortgages and the average mortgage balance in California is $301K.
Check out Nevada, where 65% of mortgages are underwater and the average LTV is over 100%.
Honestly I don't think I would be able to sleep at night wondering when (if?) the bank was coming to foreclose on my house. I have no desire to move my family from our home so the thought of not paying the mortgage, by design, wouldn't even cross my mind. That said, I can appreciate the viewpoint of doing what is necessary to improve one's financial well being, though it kind of sucks to stick it to your paying neighbours. When the taxpayer wasn't bailing out the banks the morality of these strategies was easier to digest. The entire economy is so convoluted now. It's nuts.
There is no excuse to forgo doing everything in your power to follow through with your responsibilities. After all, no one forced these people to live above their means. They should at least have the dignity to try to right their wrongs.
Your premise in spot on. I can assure you that the actual numbers are much much higher.
I have experienced that first hand. A new landlord(I guess the party came late to the northeast)who supposedly had some connection,bought the building I lived in at the peak(when my previous landlord mentioned what he wants for the building, I almost laughed). A couple of months later I overheard a conversation that he was behind on his re taxes,so I stopped mailing him the rent,and he never showed up at the door.I guess the city code were targeting his buildings,and I ended up having to leave,but I spent almost three months rent free. And not untill last month when I saw a sign on the building,that meant I could have lived for almost another year rent free had it not been for the code dept of the city....
Interesting.
While I did not consider such activity to be any sort of "planned stimulus," I have noticed that there doesn't seem to be all that much of a rush to get deliquent borrowers out.
...and I say that from personal experience.
Not that I'm proud of it, but I am currently negotiating my mortgage with my bank (one of the major players). After seeing a loss of some income, I have not paid for three months.
After faxing them some stuff (hardship letter, budget, finances, etc.), I was offered a HAMP modification - which would have reduced my monthly payment by about 30% via a 40-year fixed at a low(?) rate. I turned it down, as at this point, I've decided it only makes sense for me to stay if I get a significant reduction in principal - which HAMP does not do.
Although I do talk to the bank twice a week or so, I feel as though I have not been pressured at all...and they have now moved me to the next stage - getting me to one of their negotiators - which MAY take another 45 days from here...and as far as I know, I am not in foreclosure yet.
They also told me that if I turn down this next offer, which will probably not include a reduction in principal, I can then formally request another mod offer with a reduction in principal. IF I get that far, and turn that offer down, I can request a shortsale. IF they grant that request, the house goes on the market for 90 days. IF they don't get any offers during that time, then I can request a deed in lieu of foreclosure...which would most likely be the best overall outcome for me...I think.
My point is - from my observations, they DO NOT seem to be in a huge rush to get me out of the house.
I'll also add that all this "modification" crap seems to me to simply be postponing the inevitable, further significant decline in prices...if not making everything worse...not that I am going out on a limb there.
Rick, thanks for the anecdotal story. From the "give and take" process it sounds like at least a year of negotiation if you don't agree to any of the early resolutions. Interesting.
Everything I read has banks dragging their feet...they only want to admit to so many losses a quarter so they can keep the "pretty numbers" (value of MBS) on their balance sheet... with the new accounting treatment since spring 09, they only have to admit defeat once the actual short sale or re-acquiring of the home (in any form) is taken....
So in my viewpoint they will only admit to a certain band of losses a quarter and they know how many houses that is. They will only foreclose on that many... this can extend out half a decade by the time we get "caught up"... perhaps longer.
And we still have a slew of option ARMs and interest only puppies set to spike in 2010+.
It's not just a matter of "pretty numbers." If banks took all of their losses at once, they'd wipe out their capital and be forced to raise more or be taken over by the FDIC. If they drag their feet, they can charge the losses against earnings little by little and avoid capital impairment. You're right that banks will limit their quarterly losses but their motivation is survival not just balance sheet beautification.
Am I correct assuming this is an explanation and not an apology for their conduct?
I believe, given mark to fantasy, it is safe to say that their capital is wiped out already.
Yes, it was an explanation not an apology.
Thanks for the analysis, TraderMark. I hadn't thought of foreclosure forebearance as stimulus before, but certainly it is. Lend or borrow recklessly and the prudent will be made to pay for your mistakes. This country is toast.
Here in one of the option arm capitals, socal, the prop for sale business is dead. A long time RE agent friend has had to take on another part time job to suplement income. This same agent reluctantly admits to cases where the occupant has not been paying the mortgage for some time, mainly due to inaction from the bank.
You are excluding a good chunk of deadbeats that make partial payments or pay some months and not other months.
In this now famous video the woman spoke of no longer needing to worry about paying on her mortgage... Was this some sort of hush-hush campaign promise disseminated by ACORN (that is now being played out) ?
[url]http://www.youtube.com/watch?v=Bg98BvqUvCc[/url]
At the risk of drawing some ire...
In this now famous video, the woman spoke of no longer needing to make her mortgage payment. Was this some sort of campaign promise (discussed on the down low) disseminated by ACORN or some other appendage of the machine ? It seemed to be a ridiculous, emotional comment at the time. But now it seems she was quite prescient...
http://www.youtube.com/watch?v=Bg98BvqUvCc
Just sayin'
It's a top-down thing. Banks won't take the write down and sell at market because the welfare state is subsidizing bad paper, the astute squatter sees this and takes the trickle down (free housing).
Well, what are these "deadbeats" supposed to do? Go live in a van down by the river?
http://www.hulu.com/watch/4183/saturday-night-live-down-by-the-river
I can tell you anecdotally, this strategy of going into foreclosure and using the mortgage money for other purposes, is openly and brazenly talked about here in So. Cal.
But to be fair, in a "normal" economy you would still have a certain rate of delinquencies and foreclosures, so wouldn't you need to figure the difference to achieve the true stimulus effect?
how can you use the mortgage money for other things, wasnt it used to purchase the house?
Fine "cuenta de la vieja" as we call that kind of math in Spain. And that's the kind of reasoning that wins you a funny reputation among workplace pals. Of course that only happens when you have a workplace to go.
Bring it on!
Seems like some people don't want to face reality on this one. This can and is happening and is spreading like fire.
Was discussing this very issue with a friend the other day. We both know people who are in default/foreclosure and are "milking" it, choosing to spend the money on consumer goods, even a boat and motorcycle. At least one couple are still in their home for over a year now without paying.
The endgame for many of these people is ultimately they will be given a final notice to vacate within a certain amount of time and in some cases paid by the bank to voluntarily surrender the keys and leave the property in good condition. Not sure of the exact details but I know a locksmith who re-keys after an eviction and he told me about that.
Just waiting for reality and the free market to kick in and stop all this nonsense but regardless I think all the "responsible" people are really screwed this time.
The smart way to milk the system is by acquiring assets that 1) never lose value 2) are a form of tangible insurance.
Precious metals...ensures wealth protection.
Long-term food storage...ensures a full belly away from the chaos of 'supermarket liquidations'; more liquid than precious metals in some scenarios.
Firearms, ammunition...ensuring the right to life (private security is too expensive/potentially unreliable and law enforcement officers are too heavy to carry around (heavy absenteeism during collapses)); ammo will be more liquid than precious metals in some scenarios.
Small math problem: (75 M households in America owning a home) x (2/3 with mortgage) x (14% not making a payment) = 7 M, not 10.5M.
But I have a conceptual problem with your analysis. Suppose people were paying their mortgages. Would the banks collect the cash and burn it? No, it would be paid as bonuses to managers, or dividends to shareholders, or used to make new loans, all three of which represent consumption.
Your analysis ignores that fact that it is a closed system: the deadbeat stimulus is exactly equal to the foregone economic stimulus of the banks’ operations. No one from Venus is stimulating the US economy
Gotta disagree with you there, Bobby. How can you be sure the money would be paid as bonuses to managers, or dividends to shareholders, or used to make new loans? Might the bank not attempt to shore up its balance sheet by holding the money? Or use it to service obligations to other financial institutions? Or suppose it does pay it out: who's to say the manager or the shareholder will use it for consumption? The shareholder may very well be a pension fund, who will invest the dividend in stocks, or bonds, or whatever. The manager may well be a reasonably well off feller/bird with concerns about the way things may be headed, who therefore decides to save the money, not spend it. Giving money to someone who is otherwise flat broke will result in pretty much 100% consumption. Giving it to a better off person, or a financial institution, not necessarily. Given that most of the defaulting mortgages are in reality probably owned by the taxpayer, it's hard not to see this as a form of government stimulus.
You're justing adding another level of abstraction, the fundamental identity remains. For example, if the manager/shareholder decides to save the money, it is invested, say, in a money market fund, which in turn buys commercial paper, issued by a company to buy (consumer) something.
Possible exceptions are things like cash in the mattress or gold bars where no immediate consumption is involved. (i.e. the consumption is deferred or transferred). I think that just adds a temporal element to the identity and does not change it, although I can see the other side of the argument too.
It gets invested yes, but in what necessarily?
This is conjecture but could it not end up being lent to fuel the wonderful carry trade and therefore not boost domestic consumption at all but inflate a bubble in Asia instead say?
Maybe I missed it but what percentage did you allocate to real ownership(no mortgage, outright ownership)? Or older mortgages that will not default. I must admit that I could not get past the first few paragraphs.
But thanks.
I know someone that hasn't made a mortgage payment since June and still no NOD. They recently went on a vacation. They're underwater by about 50%, about $180K.
This whole situation is a slow-motion debt jubilee. If you can stay in a house 2-3 years without a finalized foreclosure b/c banks are reluctant to declare losses, hoping some bailout publicly financed plan will materialize, and becuase of major backlogs at the courts, it's not a half-bad deal. But it only masks the problem.
We either need to man up and let all these losses materialize or let consumers/spenders participate in some of the largesse. The current regime is crony capitalism at its worst. And it privileges the least important part of the economy at the expense of the genuine engines of productivity.
Here in Silicon Valley, I have friends who are living rent free in their "underwater" homes, awaiting eviction by banks.
I have relatives in Florida that are in law enforecement that are playing the rent free game. Then wifee goes out and buys everyone an Easter basket - they are still living there without making payments. I have investigated 200 plus bad loans as a law enforecment officer and seen first hand how it takes years to foreclose on properties when the straw buyer fails to make even one payment. It is pretty scary.
The fact that many "homeowners" are living rent-free is a form of hidden stimulus (in effect another transfer "payment"), and is clearly positive to consumer spending and GDP since mortgage payments are NOT included in GDP calculation nor are they included in PCE, but the money not paid on mortgages is spent by consumers and IS included in GDP and PCE.
Another point not made well in the above piece and commentary is that the banks'/servicers' collective inaction in NOT evicting/foreclosing "homewowners" is simply delaying the inevitable while TAKING capital away from the Zombie banks OVER TIME as they bleed these losses slowly and in effect hold properties off the market in the misguided/optimistic hope the market will improve over time.
By not recording the market value losses on bank balance sheets NOW and allowing the market to clear, they prolong the inevitable and make the next downturn and set of bank failures yet worse.
I think the banks and US government poilicymakers are badly mistaken.