Posted by Karl Denninger
I’ve said for a long time that one of the reasons our consumer spending numbers have been “reasonably good” the last six months or so – and have been improving – is that people haven’t been paying their mortgages.
Bank of America’s top mortgage executive, testifying today before Congress, will release sobering details of home-loan delinquencies, including that “hundreds of thousands of customers” haven’t made a payment in more than a year.
And, to put a number on it…
Almost 500,000 struggling loan customers have not supplied information or taken other basic steps to qualify for mortgage help. About half of them have not made a payment for more than a year, or owe more than 50 percent of the value of their homes.
That’s because those 500,000 lied about their income, assets or both when they applied for the loan originally, and that deception would be discovered.
But this also means that some 250,000 of those customers have not made a payment in a year.
If we presume that these people have average mortgage payments of $1,000 a month (and this number is probably low), this amounts to $250 million monthly that is being spent in the economy but would otherwise go to mortgage payments.
Anecdotes bear these sorts of numbers out – so-called “struggling” homeowners who, despite being delinquent on their mortgage and in fact not having paid in over a year, are spending upwards of $1,500 monthly in places like Best Buy, hairdressers and tony clothing stores.
The essential conundrum is this: Eventually, one way or another, these families will have to start making payments toward housing again. They may make those payments via their mortgage or they may be evicted and become renters but the money currently being blown on frivolities that is “propping up the economy” and leading to “strong consumer sales” is showing up there only because people are literally getting a free ride on their shelter costs.
The perversions at play here are outrageous – not only are these “homeowners” living effectively for free (and since most mortgages have escrow accounts for property taxes, those aren’t being paid either!) but in addition the banks, by not foreclosing, are holding defaulted loan paper on their books at dramatically above recovery value, thereby presenting a false view of their financial health.
Yes, the retail sales numbers this morning were good.
But how those numbers are being generated is important.
If they’re generated off personal income, then they’re good and indicate improvement in the economy. But if they’re being generated by people not paying their debts, and the evidence is that this is exactly where the money is coming from, then we’ve got a problem, because just as with the false economic signals sent by monstrous deficit spending this too is a false signal that will be responded to by the market with ultimately disastrous results.
The largest challenge in trying to formulate a clear view of the future is eliminating these distortions. The “mainstream media” simply ignores these facts, pretending they don’t exist, and then looks at the raw data to draw their conclusions. This is dangerous, even suicidal when attempting to formulate an economic view for yourself or your business, however, as these distortions are real and at some point they will disappear.
We have a new bubble ladies and gentlemen, and this one is the alleged “consumer recovery” coupled with the alleged “banking system recovery.”
Both are bogus, yet both are also intertwined; banks not foreclosing for more than a year, allowing people to live free in a house, gives the consumer faux spending power and at the same time enables the bank to claim “assets values” that in fact don’t exist.
As with all such deceptions and the economic bubbles they produce this game will continue until either the outright fraud is stopped by regulators or a cash flow shortfall forces recognition of the deception.
The damage when this unwinds, if it is not contained now by regulatory force, is going to be horrific. A concurrent collapse in consumer spending and bank balance sheets will lead us directly into the vortex of another financial crisis, and with The Government having shot its wad bailing out everyone in sight and with a severely-impaired balance sheet itself, there will be no effective policy response available to stop it.