Tuesday, April 13, 2010

One out of Ten US Mortgages is now Delinquent ... Which is Great for Consumer Spending.

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Six months after I posed the thesis that a huge rise in delinquent mortgages (some by circumstance, but a growing number by choice) is leading to a resurgent consumer, [Nov 25, 2009: America's Stealth Stimulus Plan; Allowing It's Home "Owners" to be Deadbeats]  as monies once used to pay for housing now can go towards all others forms of shopping... it is finally hitting the mainstream.  I've seen it hit major blogs in the past 6 weeks, I am starting to see it in the mainstream papers, and even CNBC caught up to it yesterday.  (lightbulb!)

I was chuckling to myself as Diane Olick (who in all fariness is one of the actual realists on CNBC) chimes in this "new theory" was causing a ruckus on the "financial blogosphere". (CNBC does not have the video of her interview available on the website for some reason)  Here is a video from earlier in the day...



Via Diane's blog:
  • Okay, so 7.9 million Americans are not paying their mortgages.  Are we really thinking about the implications of that?   I've already reported studies that show Americans are now far more likely to pay their other bills first before their mortgage (which is a big turnaround historically speaking.)  That means they pay off their credit cards, cable bills, car loans in place of their home loans. Some are forced to, while others are doing so strategically. Don't get me started again on strategic defaults...
  • Paul Jackson, publisher of Housingwire.com, wrote a fascinating article last week that put this into real cash perspective.   He describes a case study of someone who applied for the government's Home Affordable Modification Program. The person had an $1,880.00 monthly mortgage payment on which they'd defaulted, but said person's monthly bank statement showed payments to a tanning salon, nail spa, liquor stores, DirecTV bill with premium charges, and $1,700.00 in retail purchases from The Gap, Old Navy, Home Depot, Sears, etc. 
  • .....the rate at which formerly current borrowers are defaulting now is rising. I guess it's just another, innovative way of using your home as your ATM.  It currently takes well over a year, in some cases nearly two years, to go from missing a payment to being chucked out of your home.
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I might need to increase my "stimulus" assumptions as the number of Americans squatting has risen sharply in even the half year I did my analysis.  We are now at the stage 1 in 10 mortgage holders are living "rent free".  I would not be surprised if this increased to 13-15% in the next 18-24 months as people catch the wave and look at the spending habits of their neighbors who don't have to worry about minor things.... like paying a mortgage.  Here is the latest data:
  • One of ten mortgages are delinquent as of the end of February and new delinquencies continue to run at record rates.  
  • The total number of non-current first-lien mortgages and REO properties is now more than 7.9 million.
  • The number of mortgages delinquent at the end of February 2010 is 21.3% higher than the same time last year despite government-led modification efforts
  • February's foreclosure rate of 3.31 percent represented a 51.1 percent year-over-year increase.
  • Total U.S. loan delinquency rate: 10.2 percent
And if you think things are improving, think again - as I said above - many people who put nothing into their home and are underwater are going to simply join the party.
  • Furthermore, the percentage of new problem loans is also at its highest level in five years. More than 1.1 million loans that were current at the beginning of January 2010 were already at least 30 days delinquent or in foreclosure by February 2010 month-end.
Think about that last sentence... of the 7.9 million total delinquent, 1.1 million just hit in the first 2 months.  Now that's impressive... obviously word is spreading on how easy it is to get all the toys one could not afford in the past.

So the headline mainstream press will scream this news is awful.  Wrong!  Not in the new paradigm economy - all losses are born by US savers and everyone else wins in this scenario. This data is GOOD.  The more delinquent mortgages the better!  Why?  2-3 years ago we feared delinquent mortgages because it hurt banks and threatened to bring down the financial system.  Now there is no such fear - the Federal Reserve and US government have deemed our largest banks too big to fail.   They can take losses for as long as is required.  Further, with the political pressure put onto our national accounting board, just over a year ago we changed our accounting rules so the banks could mark these mortgages on their balance sheets per their discretion rather than at 'market value'.  And if you have been living outside of a cave anytime in the past 3 years you realize what happens when banks are allowed to do things at their discretion.

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So for newer readers here is the 'game' as I've outlined many times.
  1. Home'owners' default.. many of which are owners only in practice (not putting a dime down on their home).   
  2. That money once used to pay mortgages can now go into the economy as a form of permanent stimulus via consumption.   Back in November I figured the number to be akin to the spring 2008 Bush stimulus - but instead of a 1x benefit, it's a permanent stimulus. 
  3. The banks drag feet on foreclosures because to make their balance sheet look good they will only take so many foreclosures over in any 1 quarter.  Since the FASB (accounting board) rule change, they can do this since they don't have to mark the mortgages to reality - they can pretend... until of course the actual foreclosure.  So the majority of mortgages on their books are still at "their discretion" and only the % they foreclose on, do they have to mark to "market" (i.e. reality).  Hence the 6 months foreclosure now turns into the 18+ month foreclosure.
  4. The market could care less about losses for large banks or the reality of the balance sheet because the US government stands behind all major banks... they are too big to fail.  So the banks have nothing to worry about.  Buy financial stocks - they are risk free, like Treasuries.
  5. In the meantime Ben Bernanke will keep rates at 0% so the banks can "out earn" the losses.  [Apr 20, 2009: How Banks Will "Outearn" Their Losses] Borrow from Fed at 0%, invest in anything (stocks, bonds...heck even do some loans), and make the spread.  Use that 'free money' to offset foreclosure losses.

Presto magic!

So it's all a ponzi scheme in the end... the Fed is subsidizing the banks and via proxy US consumer spending.   (we see proof of that every month as consumer credit is contracting - which never happens in the US.  Why should Americans expand debt when 10% of the housing population doesn't make payments anymore?)  Since banks are not foreclosing for long periods of times, this benefit accrues not for 6 months, or 9 months but can now take 18 months to 24 months before the banks come to kick you out of your home.  The truly skilled at this game, I believe can now go without paying for a home for nearly 3 years.  How?  Default for X months... generally 15-18 months, get into government modification program (which restarts clock)... make 1 payment (optional) then re-default.  Start process over... should be able to squeeze another 15+ months out.  That is what half of American squatters are doing.  [Mar 26, 2010: Half of US Home Modifications Default - Again]

Oh, I forgot the last part of the circle of Ponzi.... each quarter the Treasury force feeds taxpayer monies into Fannie, and Freddie to make up for the losses they are suffering on the back end for supporting the entire US market.  [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer] The amount is equal to a Greek bailout about every 2-3 quarters, but America has become so immune to big numbers, we don't even discuss it anymore.  And even if Americans cared they could do nothing about it by decree of a Christmas Eve order than Mister Geithner may put as much taxpayer money into these entities as he pleases for the next 3 years.  (and trust me, if it requires more than 3 years it will continue on past that).  Just shuffle $15Billion to Fannie, and $12B to Freddie... once a quarter... it's all part of the system now.

Let us call this the circle of Ponzi life.

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So please don't sweat it when you see delinquencies increase in the months to come... the Fed and government has the whole system rigged beautifully - no one loses except American savers who are financing the whole gig.   [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savers to Recapitalize Banks and Benefit Debtors]  In fact, our economy is now so reliant on such 'stimulus' I am going to become worried once delinquencies start falling....

Until then.... the old house ATM has been replaced by an even bigger, shinier, and newer new house ATM.  [Dec 13, 2009: WSJ - American Dream 2: Default, then Rent]  Now go forth and shop!*

*note: I will admit while I put 2 and 2 together in this scam in 2009, where I failed from an investment perspective is to not pile into consumer discretionary stocks once I saw default is now an encouraged practice in Cramerica.  My bad.

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