Popular media discovering where all those delinquent mortgage payments are going

I was going to blog about this yesterday afternoon but fundmymutualfund yet again scooped me on the entry and added his usual commentary to the matter.  As I have implied before the money NOT going to paying a mortgage is just being spent by Joe and Jane Consumer. 

Diana Olick of CNBC:

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.
First 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.
Writes Jackson:
Even if you assume that just half of the current 7.4 million currently delinquent mortgages fit this sort of ’spending profile’ (that is, they are spending their mortgage) and you assume a $1,000 median monthly mortgage payment for most U.S. homeowners — you get a $3.7 billion boost per month to consumer spending. It’s certainly enough spending to matter in the overall scheme of things.

To sum up the program as described by fundmymutualfund:

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 tell me what you think will happen to consumer spending when those 10% of people with late mortgages finally get kicked out of their homes and the banks are finally forced to realize the loss on the loan?  You wonder why the banks are not lending?  Extend and pretend only works so long. . .

A veteran's view on short term interest rates pinned at zero

While I disagree with Mr. Koo's prescription for getting out of Japan's mess (more stimulus) his battlefield view of what happened and why Japan is going on 20+ years of malaise should not be discounted:



(ht: Pragmatic Captialist)

Jim Chanos on China and Rogoff on Excessive debt

Here's 2 interviews for your digestion.  Jim Chanos last night on Charlie Rose regarding China and Mr. Rogoff on how excessive debt growth eventually gets you into trouble.  I reccommend (again) you read the book "This time is different" by Rogoff & Reinhart

Charlie Rose Interviews Jim Chanos

Charlie Rose Interviews Kenneth Rogoff

Consumer credit continues dropping

Consumer credit continues falling.  The rate of decline appears to have stabilized but this means consumer credit continues to contract with no anticipated point of stabilitzation.

Longer term a deleveraged consumer is good news.  Getting there is not pleasant, whether it be from consumer paydowns or bank writing off debts.  As I have mentioned before the decline in consumer credit and debt prevents a strong recovery.  Not only is the added impulse of new debt (and thus spending) missing but the additional drag of debt reduction is still present.

After the inventory bounce recedes in the next 2 quarters GDP growth will remain muted in my opinion.

Watching the Greek tragedy -- 10 year Greek bond rates

The Greek Tragedy is not over, even with 'assurances' by the EU and IMF they stand ready to help.  If you'd like a front row seat to events and watch what everyone else is watching I suggest you keep an eye on 10 Greek bond yields.  While yields spiked and fell back earlier this year they have begun creeping upwards.  If they continue upwards this will eventually precipitate another risk-off selloff in the markets.

The recent debt auctions by Greece have been met with lower bid / cover ratios and lower foreign participation. 

Non-domestic investors accounted for 80 percent of purchases of the first bond in January, 77 percent of the second, and 57 percent of the third. Reuters

While the Greek issue has slid back off the front burner it has not been resolved.  Abrose Evans-Pritchard has an interesting blog post about this very issue recently and his conversation with Carmen Reinhart regarding the slow motion trainwreck that is Greece:

But I digress. Professor Reinhart said Greece cannot hope to escape from its debt trap under the current EU austerity plan. The cure of devaluation is blocked by EMU membership. The restrictive monetary policy of the European Central Bank — a contraction of both M3 money and lending to firms, record low core inflation — must inevitably unleash deflationary forces in Club Med states already trapped in credit busts.
A country can in theory deflate its way back to competitiveness by an `internal devaluation’, ie relative wage cuts, in this case by 20pc to 25pc . . .

On a parting note, Professor Reinhart says the only budget deficit that matters in a crisis is the “cash deficit”, and this reached 16pc of GDP in Greece last year — not the 12.7pc officially registered under “accrual” accounting.
As countries near default, they typically find all kinds of way to disguise their troubles, by shifting debts between government agencies and delaying payments.
“In the end, everything comes out of the woodwork. You realize that it is even worse than you thought,” she said.

Greece is seriously behind the 8 ball and faces tough choices with no easy solution.  They can either drastically cut spending and face a severe recession, accept IMF/EU austerity and lending support, or even default and leave the Euro. I think the last option is least likely but I'm not making any bets for a positive outcome regardless of what happens.

Carmen Reinhart has a recent  interesting paper regarding country growth rates declining as debt/GDP levels rise.  I am currently reading the book she co wrote - This Time is Different and the paper is an excellent primer to the detailed description in the book. Read the paper and then consider buying the book.

The pragmatic capitalist also has some video by MIT professor Simon Johnson about the Greeks.

The locals are also fleeing the Greek financial system.  From the Telegraph:  (ht Zerohedge)

More than €3bn (£2.6bn) of deposits held by Greek households and companies left the country in February, while in January about €5bn of deposits were moved out, according to the latest figures available from the Bank of Greece.

Switzerland, the UK and Cyprus have been the largest recipients of the money, with the wealthiest Greeks looking to move their deposits to Swiss banks accounts to escape the more punitive tax measures many fear will be introduced in the wake of the country's economic crisis.

It's never good when the locals start pulling money out of the banks. . . .

Chinese lending update --- Is the peak in?

It's been a while since I last updated you on Chinese loan growth.  Some of that was due to the problems of getting the data out of China. I was finally able to extract the data and it appears the peak in lending is finally in.  March data comes out soon but considering the difficulties of updating this data I thought I'd get you up to date now.

Even with the 'record' lending in the first two months of 2010 both the trailing twelve month total of lending and year over year percent change of total loans outstanding have peaked.

As with every massive increase in lending it ends up on all sorts of places and turns out to be much more prevalent than commonly thought.  Elite Chinese Politics blog (Mr. Victor Shih) has some serious allegations of hidden debt in the local government investment entities that are the analog of the Special Investment Vehicles (SIV's) of our banking bust.  Here's some more reading on the matter at businessinder.com and here.  Of course this is difficult to 'prove' as the Chinese accounting books are not the most transparent but Mr. Shih's work should not be discounted out of hand.  I suggest you go to his blog and read the comments and rebuttals.  It's good stuff. . .

Home loan delinquencies keep rising

From Calculatedrisk  Home loan delinquency rates keep going up.   As I have mentioned before this may be one reason consumer spending keeps slowly rising as people are just not paying their home loans. . .  

All these late paying homes represent a serious overhang of 'shadow' inventory hinted at by several blogs and news outlets. As you can see some portions of the 'shadow' can be quantified.  When this data series finally starts falling we'll hopefully start to see an end of the inventory overhang .  I'm not holding my breath.