When Will the Pivotal Nature of the Foreclosure Crisis be Understood


I suppose it’s for any number of reasons, but it’s more than obvious that the foreclosure crisis is still not being recognized as having the impact that it unquestionably has on our economy.


Perhaps it’s because there are no apparent solutions… perhaps it’s because those providing commentary have little or no understanding of what it’s like to be a middle class, middle age parent struggling through today’s deepening economic morass… or maybe it’s because the entire idea of solving a problem seen as affecting only “irresponsible borrowers” is so distasteful that it cannot even be considered… I really don’t know.


I suppose it could be a little of each.  Or, I guess it could be something I haven’t even considered… although I don’t think the latter’s the case.  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.  I’ve 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.  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.  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.  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?


Let’s bring this down to a level we can all readily understand.  When we talk about economic growth or economic recovery, what we’re really looking for is consumer spending.


There are only three possible sources of spending in any economy: government, business and consumer.  That’s all there is.  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.  It doesn’t matter if businesses get a tax cut… or the Fed lowers their borrowing costs by lowering interest rates.  Neither of those things are going to make business owners stupid, and stupid is what you’d have to be to expand your business when your customers are buying fewer of your products or services.


Okay, so if consumers aren’t spending, and business won’t 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 sector… and in large part, only on that.  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, they’d start lending again, and our economy would come back to life after its near-death experience that occurred during… pardon the double entendre… the Fall of 2008.  And nothing else mattered or required saving, just the banks would do it.


And this thinking, even though it should be obvious that it isn’t working, hasn’t changed.


QE3 – Third time’s 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.  This QE-Forever plan has the Fed purchasing $40 billion a month in mortgage backed securities (“MBS”).


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.  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 himself…


“Our 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.”


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?  You don’t have to be any sort of economics genius to answer this question… the answer is: Not a chance in the world.  The idea of a snowball in hell should be coming to mind.


Why not?  It’s simple really.  First of all, no one knows whether commercial banks will pass on the lower rates to customers, businesses or consumers.  Rates are pretty darn low already, after all, and borrowing has remained anemic.  Why lower them further if demand isn’t going to increase?  All that would do is increase the bank’s risk should there be defaults in the future.


More importantly, it won’t work because it’s not solving a problem we have.  Ask yourself the following question: Are you holding back on your spending because of interest rates that are too high?  Of course not… that’s just a ridiculous proposition.  If you asked everyone you know that question, I’d venture to guess that not a soul would reply, “Yep, it’s the high interest rates that are holding me back in the spending department these days.”


As to what businesses will do because of lower long-term interest rates, we’ve already covered that, and whatever the answer, we know businesses won’t start increasing their spending as long as consumers aren’t doing the same.  Mr. Bernanke can QE for the rest of his life, and it’s not going to have the effect he thinks it “ought to,” 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.  And since consumers aren’t spending, and business won’t spend until consumers do, then government spending is all we’ve got… and now we’re sure-as-shootin’ going to reduce that.


Reducing government spending, when it’s 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 foreclosures… further lowering home prices… causing more homeowners to go underwater.


And once underwater, owing more than your home is worth, you’re a foreclosure waiting to happen.  All it takes is a life event… such as divorce, illness, injury or job loss.



Of course, such life events are not new.  Essentially, they’ve been around forever.  But they didn’t 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 patch… or they sold their homes.


Once you’re underwater, however, as at least half of homeowners are today, you can’t borrow against your home’s equity, nor can you sell your home, so any of those life events are likely to hit you where you live.  And that means more foreclosures… which means lower home prices… 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 we’ve got a serious problem on our hands, because foreclosures aren’t going to stop on their own.  And that’s not a forecast… a prediction… a maybe-it-could-happen… it’s more like a water is wet, the sky is blue sort of thing.


Let me ask you a question…


Now, pretend that I’m standing in front of a room filled with middle class homeowners… regular folk… your friends and neighbors.  And let’s say I were to ask those in the room the following question:


“If I could assure you that your homes wouldn’t be lost to foreclosure and that home prices would stop falling, how many would increase their spending?”


Wouldn’t most of the people raise their hands in response to that question?  Sure they would.  They might go out and buy a barbeque grill… they might do some landscaping… maybe they’d fix up a bathroom or buy a new appliance for the kitchen.  Or maybe they’d do none of those things, but they’d feel comfortable enough that they’d take a vacation or go out to dinner.  The point is, they’d increase their spending for sure.


And what would happen as a result of that increased spending?  Well, companies would see the increasing demand and start to expand, some would borrow… many would HIRE.  And that would mean job creation.  And that would mean more consumer spending… which would lead to further expansion by businesses… increased tax revenues for state and federal governments… 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:


“If I could assure you that you wouldn’t lose your homes and that home values would stop falling… and that you could get jobs that paid a decent wage, and make you feel as if you wouldn’t lose the jobs you now have, how many of you would increase your spending starting right now?”


That’s what you call a no-brainer, right?  No question about it… you want consumer spending to get a move on… stop foreclosures… to stabilize home prices… to stimulate spending… which leads to business expansion… and creates jobs… which leads to increased consumer spending.


Fed Chair Bernanke has made it clear… the prerequisite to our economy growing again is consumer spending increasing.  So, he’s QE’ing to the tune of $40 billion a month in an effort to lower long-term interest rates in the hopes that we’ll start borrowing and spending and if that’s not the long way around the barn, I don’t know what would be.  And I don’t care how optimistic you are, the chances of QE3 working as planned are let’s just say… remote.


On the other hand, what I’m describing is a sure thing.  All we have to do is stop the foreclosures that can be modified, short sale those homes that can’t… and stabilize home prices.  Then just sit back and watch as consumer spending starts to rise.


And I guarantee you this about my plan… it won’t 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.  Oh, and one other benefit I forgot to mention… it’ll work almost immediately.  Just announce it and about 100 million Americans will breathe a sigh of relief.


The foreclosure issue to elect the next president…


If what I’ve just laid out isn’t 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.


Don’t think so… think again.  We’ve lost more than four million homes to foreclosure since 2008, and there are four million on deck waiting to crash and burn.  Figure the eight million all have a friend or two and we’re talking about something in the neighborhood of 20 million voters who I think it’s safe to say are none to happy with the way things have been going these last four years.


Now, let’s look at the electoral map.  What it comes down to… Ohio and Florida… two states absolutely devastated by foreclosures… ruined, wrecked, mere shadows of their former selves.



Romney needs Florida to win.  Without it, he’ll have to win every single state leaning his way, plus “all of the others that Obama won four years ago but now are too close to call – Ohio, Virginia, Iowa, Colorado, Nevada and New Hampshire,” according to a September 14th article in the Huffington Post


So, surprise, surprise… 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 country’s 12th largest servicer, has been offering shared appreciation modifications for over a year now, and the idea does make sense.  When the borrower sells the home, 25 percent of any upside goes to the investor who agreed to write down the loan.


Romney’s campaign has started laying the blame for Florida’s foreclosures on Obama policy and programs in his television ads.  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 elections… Romney could win.


The thing is… it doesn’t take much to get foreclosure victims all riled up.  And Romney, in a recent US News and World Report, said the following…


“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.”


Let’s face it… Obama’s housing programs, under the direction of Treasury Secretary Tim Geithner, have been downright awful.  True, there’s been some improvement recently, but for millions of homeowners it’s far too late to matter.  And the president’s propensity to even bring up the foreclosure crisis is very near non-existent.


There’s 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.  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, it’s 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 that’s unlikely to change until after the new year arrives.


The writing, however, is on the proverbial wall.  Consider the numbers from California’s State Finances – July 2012, recently posted by Mish Shedlock.  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.  And in addition, corporate tax in California for July, as compared with last July is also down by almost 10 percent.


California’s report attempted to explain away the declines in tax receipts as being “a timing difference.”  But, as Mish pointed out, “Sales taxes collections off 33.5% vs. budget and 40% from a year ago is not a ‘timing issue’.  Either California data is extremely messed up, or retail sales nationally will be revised sharply lower.”


And that’s just the tip of the lies-berg, as it were.  Europe is a disaster waiting to happen.  The unemployment picture in this country is consistently anemic at best.  And, again from Mish’s site, Global Economic Analysis, you’ll see that the hype just keeps coming when you read, New Home Sales – Hype vs. Reality


I don’t like being a porcupine in a balloon factory, but there’s just nothing to be happy about economically speaking.  You want to believe the happy news, fine by me.  But, you know it like I do… and everyone else does too… we’ve got problems that aren’t going away by themselves or anytime soon.


The economic reality is far different than what’s coming out of the mouths of the paid economists we’ve got running around today.  And it’s been like that for the last five years, so I’m confident that we’ll soon stop listening to the drivel about a recovery no one can see or feel.  Once we do that, then we’ll start demanding that things change.


And still… no matter what… the first step is going to be coming to understand that foreclosures, and not irresponsible borrowers, are what’s breeding foreclosures.  And that by allowing them to continue unabated we’re only punishing ourselves.


Mandelman out.

Page Rank