When Will the Pivotal Nature of the Foreclosure Crisis be Understood
I suppose itâs for any number of reasons, but itâs more than obvious that the foreclosure crisis is still not being recognized as having the impact that it unquestionably has on our economy.
Perhaps itâs because there are no apparent solutionsâŚ perhaps itâs because those providing commentary have little or no understanding of what itâs like to be a middle class, middle age parent struggling through todayâs deepening economic morassâŚ or maybe itâs because the entire idea of solving a problem seen as affecting only âirresponsible borrowersâ is so distasteful that it cannot even be consideredâŚ I really donât know.
I suppose it could be a little of each.Â Or, I guess it could be something I havenât even consideredâŚ although I donât think the latterâs the case.Â What I do know is that the impact of the ongoing foreclosures will not only continue to be the primary force behind the negative trends in our economy, but further the foreclosure issue is about to sway our presidential election and thus will determine who sits in the Oval Office for the next four years.
And considering the evidence available after almost six years of crisis, it is absolutely stunning that no one is talking about this fact, much less trying to change it.Â Iâve started to actually believe that few understand the dynamics involved, and that is truly frightening.
But this past week, when I saw that Moody’s Investors had finally started to wake up to the economic impact of the foreclosure crisis, I decided it was time for me to write about the subject once again.Â Moody’s blamed rising foreclosures and delinquent mortgages as threats to the credit quality of New Jersey’s state and local governments.
According to Reuters, as a result of New Jerseys high number of foreclosures…
“The state’s credit quality is also under pressure. On September 18, Standard & Poor’s Ratings Services revised its outlook to negative from stable on New Jersey’s “AA-minus” general obligation rating, citing a structural budget imbalance and optimistic revenue assumptions.”
Wow… that’s some brand new thinking right there.Â I remember a couple of months ago, when Stockton, California filed bankruptcy and the cause of the city’s troubles was explained as being everything but foreclosures… even though Stockton has been almost the epicenter of the foreclosure crisis.Â According to the press, Stockton was in financial trouble because of its city worker contracts, its pension liabilities, its unions, its schools, and even declining home values… just not foreclosures.
It was like everyone was agreeing to overlook the obvious and remain certain that it wasn’t foreclosures… when of course it was.
What are we talking about when we talk about economic growth?
Letâs bring this down to a level we can all readily understand.Â When we talk about economic growth or economic recovery, what weâre really looking for is consumer spending.
There are only three possible sources of spending in any economy: government, business and consumer.Â Thatâs all there is.Â And with spending comes borrowing as companies seek to expand which also means jobs are created, and a virtuous cycle begins as the economy grows.
But, in our economy today, companies are not going to spend and expand as long as consumer spending is contracting.Â It doesnât matter if businesses get a tax cutâŚ or the Fed lowers their borrowing costs by lowering interest rates.Â Neither of those things are going to make business owners stupid, and stupid is what youâd have to be to expand your business when your customers are buying fewer of your products or services.
Okay, so if consumers arenât spending, and business wonât spend until consumers do, then that leaves only the government as far as spending is concerned.
But, over the last four years or so, our government chose to blow its wad bailing out and otherwise supporting the financial sectorâŚ and in large part, only on that.Â For reasons that I may never fully understand, our Wall Street educated government officials, including Treasury Secretary Geithner, Federal Reserve Chairman Bernanke and others cut from the same cloth, believed that if they could stabilize the banks, theyâd start lending again, and our economy would come back to life after its near-death experience that occurred duringâŚ pardon the double entendreâŚ the Fall of 2008.Â And nothing else mattered or required saving, just the banks would do it.
And this thinking, even though it should be obvious that it isnât working, hasnât changed.
QE3 â Third timeâs a charm?
Recently, Fed Chair Bernanke announced QE 3, a third round of quantitative easing, but this time with no pre-determined ending, as I understand it.Â This QE-Forever plan has the Fed purchasing $40 billion a month in mortgage backed securities (âMBSâ).
The idea is that this buying of MBS by the Fed will reduce the amount held by the private sector, which will bid up their price of these securities and in turn lower their yield.Â And because MBS are a benchmark for mortgage interest rates, the idea is that this will lower long-term interest rates, including the rates homeowners pay on their mortgages.
According to Mr. Bernanke himselfâŚ
âOur mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing.â
So, once again, the plan is to reduce interest rates in an attempt to get consumers and businesses to either borrow more money from banks, or put more money in their pockets by refinancing to lower rates, so they can spend that money and thus cause our economy to grow.
Will this work?Â You donât have to be any sort of economics genius to answer this questionâŚ the answer is: Not a chance in the world.Â The idea of a snowball in hell should be coming to mind.
Why not?Â Itâs simple really.Â First of all, no one knows whether commercial banks will pass on the lower rates to customers, businesses or consumers.Â Rates are pretty darn low already, after all, and borrowing has remained anemic.Â Why lower them further if demand isnât going to increase?Â All that would do is increase the bankâs risk should there be defaults in the future.
More importantly, it wonât work because itâs not solving a problem we have.Â Ask yourself the following question: Are you holding back on your spending because of interest rates that are too high?Â Of course notâŚ thatâs just a ridiculous proposition.Â If you asked everyone you know that question, Iâd venture to guess that not a soul would reply, âYep, itâs the high interest rates that are holding me back in the spending department these days.â
As to what businesses will do because of lower long-term interest rates, weâve already covered that, and whatever the answer, we know businesses wonât start increasing their spending as long as consumers arenât doing the same.Â Mr. Bernanke can QE for the rest of his life, and itâs not going to have the effect he thinks it âought to,â to use the words found in his quote above.
So, having blown its wad on the banking sector without causing any sort of recovery in consumer spending, the deficit hawks are now out in force, and the federal government is consumed by the need to reduce its spending all over the place in order to reduce the deficit and national debt.Â And since consumers arenât spending, and business wonât spend until consumers do, then government spending is all weâve gotâŚ and now weâre sure-as-shootinâ going to reduce that.
Reducing government spending, when itâs the only source of spending available to pull us out of our economic doldrums, can only result in reducing our GDP, and as programs get cut, putting more people out of work, which by the way, will increase foreclosuresâŚ further lowering home pricesâŚ causing more homeowners to go underwater.
And once underwater, owing more than your home is worth, youâre a foreclosure waiting to happen.Â All it takes is a life eventâŚ such as divorce, illness, injury or job loss.
Of course, such life events are not new.Â Essentially, theyâve been around forever.Â But they didnât lead to foreclosure in most instances, because when they happened people either borrowed by taking out a second mortgage or home equity line of credit to get them through the rough patchâŚ or they sold their homes.
Once youâre underwater, however, as at least half of homeowners are today, you canât borrow against your homeâs equity, nor can you sell your home, so any of those life events are likely to hit you where you live.Â And that means more foreclosuresâŚ which means lower home pricesâŚ which means more people pushed underwater.
Unless the government has some secret plan to stop divorces, prevent illnesses and/or injuries from happening, or eliminate job loss or income reduction, then weâve got a serious problem on our hands, because foreclosures arenât going to stop on their own.Â And thatâs not a forecastâŚ a predictionâŚ a maybe-it-could-happenâŚ itâs more like a water is wet, the sky is blue sort of thing.
Let me ask you a questionâŚ
Now, pretend that Iâm standing in front of a room filled with middle class homeownersâŚ regular folkâŚ your friends and neighbors.Â And letâs say I were to ask those in the room the following question:
âIf I could assure you that your homes wouldnât be lost to foreclosure and that home prices would stop falling, how many would increase their spending?â
Wouldnât most of the people raise their hands in response to that question?Â Sure they would.Â They might go out and buy a barbeque grillâŚ they might do some landscapingâŚ maybe theyâd fix up a bathroom or buy a new appliance for the kitchen.Â Or maybe theyâd do none of those things, but theyâd feel comfortable enough that theyâd take a vacation or go out to dinner.Â The point is, theyâd increase their spending for sure.
And what would happen as a result of that increased spending?Â Well, companies would see the increasing demand and start to expand, some would borrowâŚ many would HIRE.Â And that would mean job creation.Â And that would mean more consumer spendingâŚ which would lead to further expansion by businessesâŚ increased tax revenues for state and federal governmentsâŚ why, before you know it, we might just be able to say that things are looking up.
Now, what if I could ask the room filled with homeowners the following question:
âIf I could assure you that you wouldnât lose your homes and that home values would stop fallingâŚ and that you could get jobs that paid a decent wage, and make you feel as if you wouldnât lose the jobs you now have, how many of you would increase your spending starting right now?â
Thatâs what you call a no-brainer, right?Â No question about itâŚ you want consumer spending to get a move onâŚ stop foreclosuresâŚ to stabilize home pricesâŚ to stimulate spendingâŚ which leads to business expansionâŚ and creates jobsâŚ which leads to increased consumer spending.
Fed Chair Bernanke has made it clearâŚ the prerequisite to our economy growing again is consumer spending increasing.Â So, heâs QEâing to the tune of $40 billion a month in an effort to lower long-term interest rates in the hopes that weâll start borrowing and spending and if thatâs not the long way around the barn, I donât know what would be.Â And I donât care how optimistic you are, the chances of QE3 working as planned are letâs just sayâŚ remote.
On the other hand, what Iâm describing is a sure thing.Â All we have to do is stop the foreclosures that can be modified, short sale those homes that canâtâŚ and stabilize home prices.Â Then just sit back and watch as consumer spending starts to rise.
And I guarantee you this about my planâŚ it wonât cost $40 billion a month for the next Lord-knows-how-many-months to do it, nor will it lead to insane inflation or currency devaluation.Â Oh, and one other benefit I forgot to mentionâŚ itâll work almost immediately.Â Just announce it and about 100 million Americans will breathe a sigh of relief.
The foreclosure issue to elect the next presidentâŚ
If what Iâve just laid out isnât enough to convince you that foreclosures are the pivotal issue in our economy, then consider this: Foreclosure victims will be the determining factor in the upcoming presidential election.
Donât think soâŚ think again.Â Weâve lost more than four million homes to foreclosure since 2008, and there are four million on deck waiting to crash and burn.Â Figure the eight million all have a friend or two and weâre talking about something in the neighborhood of 20 million voters who I think itâs safe to say are none to happy with the way things have been going these last four years.
Now, letâs look at the electoral map.Â What it comes down toâŚ Ohio and FloridaâŚ two states absolutely devastated by foreclosuresâŚ ruined, wrecked, mere shadows of their former selves.
Romney needs Florida to win.Â Without it, heâll have to win every single state leaning his way, plus âall of the others that Obama won four years ago but now are too close to call â Ohio, Virginia, Iowa, Colorado, Nevada and New Hampshire,â according to a September 14th article in the Huffington Post.Â
So, surprise, surpriseâŚ Romney has started talking about foreclosures, saying his administration will encourage alternatives, including a shared appreciation modification where borrowers get their loans reduced to market value but agree to share any upside with the investor.
Ocwen, now the countryâs 12th largest servicer, has been offering shared appreciation modifications for over a year now, and the idea does make sense. Â When the borrower sells the home, 25 percent of any upside goes to the investor who agreed to write down the loan.
Romneyâs campaign has started laying the blame for Floridaâs foreclosures on Obama policy and programs in his television ads. Â And if those whose lives have been affected by foreclosure all decide to punish Obama and the Democrats, like they did for the mid-term electionsâŚ Romney could win.
The thing isâŚ it doesnât take much to get foreclosure victims all riled up.Â And Romney, in a recent US News and World Report, said the followingâŚ
“To address the housing crisis, President Obama rolled out an alphabet soup of more than ten housing finance programs rather than offering a real solution,” the (Romney) campaign website says. “President Obama has hamstrung the economic recovery and slowed the recovery of the housing market.”
Letâs face itâŚ Obamaâs housing programs, under the direction of Treasury Secretary Tim Geithner, have been downright awful.Â True, thereâs been some improvement recently, but for millions of homeowners itâs far too late to matter.Â And the presidentâs propensity to even bring up the foreclosure crisis is very near non-existent.
Thereâs still time for things to change in one direction or another, I understand, but it will be interesting to see whether the foreclosure issue, although dormant all year, ends up front and center.Â If it does, the issue may end up being pivotal to putting someone in the Oval Office as Florida and Ohio become real wild cards.
Of course, itâs pre-election season, which will be followed by fourth quarter holiday shopping, so it goes without saying that all the economic news is happy economic news at the moment, and thatâs unlikely to change until after the new year arrives.
The writing, however, is on the proverbial wall.Â Consider the numbers from Californiaâs State Finances â July 2012, recently posted by Mish Shedlock.Â Compared to the state budget forecasts, California sales tax receipts are down by 33.5 percent in July, and compared to the same time last year, sales tax receipts are down by 40 percent.Â And in addition, corporate tax in California for July, as compared with last July is also down by almost 10 percent.
Californiaâs report attempted to explain away the declines in tax receipts as being âa timing difference.âÂ But, as Mish pointed out, âSales taxes collections off 33.5% vs. budget and 40% from a year ago is not a âtiming issueâ.Â Either California data is extremely messed up, or retail sales nationally will be revised sharply lower.â
And thatâs just the tip of the lies-berg, as it were.Â Europe is a disaster waiting to happen.Â The unemployment picture in this country is consistently anemic at best.Â And, again from Mishâs site, Global Economic Analysis, youâll see that the hype just keeps coming when you read, New Home Sales – Hype vs. Reality.Â
I donât like being a porcupine in a balloon factory, but thereâs just nothing to be happy about economically speaking.Â You want to believe the happy news, fine by me.Â But, you know it like I doâŚ and everyone else does too… weâve got problems that arenât going away by themselves or anytime soon.
The economic reality is far different than whatâs coming out of the mouths of the paid economists weâve got running around today.Â And itâs been like that for the last five years, so Iâm confident that weâll soon stop listening to the drivel about a recovery no one can see or feel.Â Once we do that, then weâll start demanding that things change.
And stillâŚ no matter whatâŚ the first step is going to be coming to understand that foreclosures, and not irresponsible borrowers, are whatâs breeding foreclosures.Â And that by allowing them to continue unabated weâre only punishing ourselves.