This page has been archived and commenting is disabled.

Essays In Fragility: The Rise And Fall Of Phantom Housing Collateral

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

How much phantom housing collateral is still on the books? Nobody knows, and that in itself renders the housing/mortgage sector fragile.

Mortgage debt doubled in a mere decade. If we go back to pre-bubble 1997, residential mortgages totaled $5.1 trillion. (Source: mortgage debt outstanding, 1959-2003). This was roughly 50% of real GDP of $10 trillion (source: Real U.S. GDP).

At the top of the bubble, residential mortgage debt was $10.57 trillion, more than double the total of 1997. (Source: Balance Sheet of Households, Federal Reserve). This was 79.3% of real GDP--a rise of 30%.

As a percentage of disposable personal income, mortgage debt rose from 53% in 1960 to 113% in 2003. Income rose over those 43 years, of course, but mortgage debt rose much faster.

Mortgage debt has declined as lenders have written off losses. Mortgage debt has declined from $10.56 trillion in 2007 to $9.48 Trillion in 2012. Is it coincidence that this $1.1 trillion decline equals the Fed's purchases of mortgages since 2009? The World's Largest Money-Laundering Machine: The Federal Reserve (October 8, 2012) "The Fed is now where mortgages go to die" -- Catherine Austin Fitts

This reduction in debt and the recent modest increases in housing prices has pushed homeowner's equity up from $6.7 trillion in 2009 to $7.7 trillion in 2012. That extra $1 trillion has raised owner's equity as a percentage of household real estate up from an abysmal 39.8% to 44.8%--but this is a far cry from the $10.2 trillion in equity logged in 2007. (Recall that 1/3 of homes are owned free and clear, with no mortgage at all. In these cases, homeowner equity is 100% of the market value of the home.)

Courtesy of Chartist Friend from Pittsburgh, here are two charts contrasting housing equity with debt: the first is mortgage debt, the second is total household debt.

Note the "wealth effect" as housing values soared, providing collateral for more debt, and the "reverse wealth effect" as phantom collateral vanished.

Was the equity in the bubble years real or phantom? It was real for those who sold and turned the bubble equity into cash. But how many of the 75 million mortgage holders sold and did not acquire another mortgage? Given that the number of mortgages has barely budged (around 50 million), not many.

For everyone else, borrower and lender alike, the equity and the collateral were phantom.

This rise and fall of phantom collateral leads us to ask: how much of the $17.2 trillion in household real estate is still phantom? How many homes on lenders' books are valued higher than their real market value? How durable is this "housing has bottomed" surge in prices if the global economy slides into recession?

Why ask these questions? Consider this chart of income, courtesy of Doug Short:

If mortgage debt has fallen 10%, and household income has also declined by about 10%, then what's changed? Recall that roughly 50% of household income flows to the top 10%. If the income of the top 10% rises while the income of the lower 90% falls, the median income will be skewed. In other words, the declines experienced by the lower 90% may well exceed the 9% shown on the chart.

As a percentage of disposable income and GDP, mortgage debt is still at historic highs. The fact that mortgage debt is down from its bubble highs does not mean all phantom collateral has vanished. It only means that all interested parties, borrowers, homeowners and lenders alike, have a stake in promoting the claim that housing has bottomed.

Where would households' ability to borrow be if housing and income both decline? In a way, the Status Quo is desperately trying to boost housing to compensate for the reduction in income. What's left to leverage if both income and equity are declining?

So here's the basis for the "bottom is in":

1. The global economy is sliding down a slippery slope into recession.

2. Real household incomes have declined by 10% or more.

3. Mortgage rates are already at historic lows and cannot fall much more, if any.

And last but not least, systemic mortgage fraud is a thing of the past: if you forget about rule of law and justice, that is:

How much phantom collateral is still on the books? Nobody knows, and that in itself renders the housing/mortgage sector fragile.

My new book Why Things Are Falling Apart and What We Can Do About It is now available in print and Kindle editions--10% to 20% discounts.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 12/13/2012 - 14:04 | 3060083 JeremyWS
JeremyWS's picture

What abut the Housing recovery? (!)

Thu, 12/13/2012 - 14:10 | 3060095 NewThor
NewThor's picture

I ain't 'fraid of no ghost (cities)!

Thu, 12/13/2012 - 15:21 | 3060397 boogerbently
boogerbently's picture

I trade with TDAmeritrade. For every company listed on the exchanges they provide a TON of research.

News, charts, earnings, fundamentals....

Each category has sub categories of research.

For ANY of the major banks/brokerage houses, when checking on "Financial Strength", the result is:

"The data is not available to complete this analysis."

We have not known where the banks stood (financially) for 4 years. Any "earnings" have been a function of govt. largesse.

Just like the political reporting, it's ALL crap.

Thu, 12/13/2012 - 14:08 | 3060089 TheSilverJournal
TheSilverJournal's picture

Housing is set to drop at least another 75% in real terms.

Thu, 12/13/2012 - 14:15 | 3060108 lynnybee
lynnybee's picture

'Housing is set to drop at least another 75% in real terms'.   yes!  i told one of my realtor friends that housing bottoms when the desperate seller accepts a few gold coins for it & he didn't have a clue what i was talking about.    those damn banksters !  i know what they've been up to now that i'm educated on the internet.

Thu, 12/13/2012 - 14:36 | 3060174 NotApplicable
NotApplicable's picture

What's funny is that they're fine with merely front-running the latest FHA scam, never wondering how they are cutting off the proverbial tree-limb upon which they stand.

Thu, 12/13/2012 - 15:25 | 3060418 boogerbently
boogerbently's picture

HUGE increase in foreclosures now that "robosigning" fiasco ended. 5-8 X increases YOY.

.....that can't be good! AND

They're talking about eliminating the "Homeowners Tax Deduction". I'm sure THAT will help. NOT

Thu, 12/13/2012 - 14:11 | 3060096 Cognitive Dissonance
Cognitive Dissonance's picture

I can't wait for the 1% 100 year first mortgage.

<Brings new meaning to the phrase..."Till death do us part.">

Thu, 12/13/2012 - 14:13 | 3060098 NewThor
NewThor's picture

I've got some 1000 year Earth bonds I'd be happy to sell you.

The YIELD is out of this world!

Thu, 12/13/2012 - 14:12 | 3060099 donsluck
donsluck's picture

Jeez, move forward already. We need to discuss how to survive in our new fascist state. With central control over all aspects of our economic life, I recommend cultivating friendships with people in positions of power in government and military. Everything else is next to meaningless.

Thu, 12/13/2012 - 14:18 | 3060120 LFMayor
LFMayor's picture

I recommned buying some face collanders, level 3a vests with level 3 plates, plenty of straps, gats n shit and a conex of freeze dried food, along with some heirloom seeds and 150 acres in SW Missouri. 

Your friends in high places aren't going to be much use when there are no high places left, except on The Humongous's cabinet.

Thu, 12/13/2012 - 14:20 | 3060124 evolutionx
evolutionx's picture

DEUS EX MACHINA

With most of the world’s major economies as well as the financial system bankrupt, there is only one solution that can save the world economy. Like in the Greek tragedies, Deus ex Machina is now the only way that the world can avoid a total economic collapse. This would involve God being lowered down onto the world stage and miraculously saving the plot.


http://www.mmnews.de/index.php/english-news/9031-deus-ex-machina

Thu, 12/13/2012 - 15:33 | 3060460 boogerbently
boogerbently's picture

Bankers/politicians/corporations/citizens ALL trying to "outfraud" each other.

After the "Apocalypse" there is supposed to be 1000 years of "peace".

After which, the collective memory of God appearing, TO ALL, thundering out of the sky, will be denied and attributed to some distant astological phenomena.

 

Thu, 12/13/2012 - 14:23 | 3060136 NoDebt
NoDebt's picture

Prayer of the underwater:  Please go back up.  Please go back up.  Please go back up.

Thu, 12/13/2012 - 14:33 | 3060159 chunga
chunga's picture

Sunday, December 16 at 1:00 PM EST Attorney George E. Babcock will spend one hour attempting to explain a little of this fraud.

Tune in here FIGHT CLUB LAWYER

Sunday, December 23 Glenn Russell (Ibanez/Larace fame) will be on the show at 1:00. It should be very interesting.

And last but not least, systemic mortgage fraud is a thing of the past: if you forget about rule of law and justice, that is:

LOL!

Thu, 12/13/2012 - 14:44 | 3060213 haskelslocal
haskelslocal's picture

I enjoy reading CHS for the economic conversation, but, did this one end up mostly on the editing room floor?

One thing redundantly frustrating is how blogers/writers abound enterlace the failures of the housing bubble with the counterintuitive rebound of housing prices.

Come on guys, pick a side. Using both to serve your agenda of the moment breaks down the fundamentals of your argument.

...homeowner's equity up from $6.7 trillion in 2009 to $7.7 trillion in 2012. That extra $1 trillion has raised owner's equity as a percentage of household real estate up from an abysmal 39.8% to 44.8%--but this is a far cry from the $10.2 trillion in equity logged in 2007...

Thu, 12/13/2012 - 14:49 | 3060243 Joebloinvestor
Joebloinvestor's picture

Wait till the new FHA guy finally revalues the stuff they own.

WHOO HOO!

Thu, 12/13/2012 - 14:54 | 3060267 Watching in Bal...
Watching in Baltimore's picture

I think when the real bottom is hit it will be far too late for many if not most Americans.  

 

Thu, 12/13/2012 - 15:09 | 3060326 socalbeach
socalbeach's picture

Why is CHS mixing nominal household mortgage debt with real (inflation adjusted) income?  His own chart shows nominal household income rising (+ 24.2%). 

FAIL

"If mortgage debt has fallen 10%, and household income has also declined by about 10%, then what's changed? Recall that roughly 50% of household income flows to the top 10%. If the income of the top 10% rises while the income of the lower 90% falls, the median income will be skewed. In other words, the declines experienced by the lower 90% may well exceed the 9% shown on the chart. "

Thu, 12/13/2012 - 21:04 | 3061426 sgorem
sgorem's picture

I'm so fucking sick and tired of hearing/reading about the "Government, The Fed, Fanny Mae/Freddy Mac, yadda, yadda, yadda! IT'S NOT THE FUCKING "GOVERNMENT" THAT IS BAILING OUT, PAYING OFF, REINBURSING, OR FLAT OUT PAYING FOR SHIT, IT'S THE FUCKED OVER TAXPAYERS IN THIS LIBERAL/SOCIALISTIC COUNTRY WE FIND OURSELVES IN. GET IT RIGHT, IT'S THE TAXPAYER, DAMMIT!

Thu, 12/13/2012 - 23:31 | 3061818 DeFeralCat
DeFeralCat's picture

I liked the thought that if the Fed purchases have reduced mortgage debt by 1 trillion of the 10 trillion owed then all the QEs up until now have only, possibly reduced just one part of the deleveraging problem by only 10%. If valid, it puts into perspective the magnitude of the problem we are facing.

Fri, 12/14/2012 - 01:46 | 3061965 Clowns on Acid
Clowns on Acid's picture

" How much phantom collateral is still on the books? Nobody knows," Yes I do,,,,,

There is as much phantom colateral as the Fed is buying MBS and OP Twist. Thats why housingf prices have only fallen about 10% on average.

Take away Fed printing / buying of MBS and housing falls 30 -50%. Manhattan prices would fall at 25%.

Fri, 12/14/2012 - 05:18 | 3062066 mpyre
mpyre's picture

When they hit the reset button of global finance the PTB will fund it with a "wealth tax;"  1/3 of whatever you have in total will be confiscated to pay the bill that is due.  It will only take a "crisis" of some kind to get the global "public" behind it.

Sat, 12/15/2012 - 13:30 | 3066478 ThanksIwillHave...
ThanksIwillHaveAnother's picture

"Recall that roughly 50% of household income flows to the top 10%. If the income of the top 10% rises while the income of the lower 90% falls, the median income will be skewed. In other words, the declines experienced by the lower 90% may well exceed the 9% shown on the chart."  What?  The median is the half way point of a sorted number list so it removes the skewing of the arithmetic mean, the average.   So a little less than 50% have decline over 9%.   Regarding the collateral, M2M has been suspended for banks' real estate since 2008 so that implies a massive black hole on banks' balance sheets.  The FED isn't concerned about main street it is concerned about insolvent banks.

Do NOT follow this link or you will be banned from the site!