Every Friday Lou Barnes a local mortgage broker with Premier Mortgage Groupwrites a column called Lou’s Credit News. It started out as a one page flyer hand delivered to local Realtors. It now is distributed electronically and sydicated by Inman News a national real estate news portal. The column is dense with information, sometimes so dense you need to jump to get a breath. Lou has a unique perspective in that he has been a Realtor, a bond trader and now a mortgage broker with a different perspective. I thought this weeks column was especially good and wanted to share it with you. It deals with the depth and breadth of the housing crisis and how many households are affected. In the end, if enough of your neighbors are in foreclosure or are underwater in their mortgage it becomes your problem as well. Thanks Lou!
Lou’s Credit News
Friday, August 27, 2010
By Lou Barnes
Markets waited all week for Perfesser Bernanke’s keynote speech today at the central bankers’ conference in Jackson Hole. Fishin’ up there is good, and would have been a better use of time.
Rates are now rising sharply from their lows after the Perfesser’s murky address accurately reflected a divided and uncertain Fed, in a reactive state several miles from anticipation and pre-emption. There will be no new QE (quantitative easing, the Fed’s direct injection of invented cash) or any other substantive action until the economy declares itself, double-dip or modest recovery. The job market will be definitive, but this Fed will need to see two or more months of dipping data before moving.
Tuesday’s Wall Street Journal contained the most extraordinary official leak in decades, a revelation of the economic and policy opinion of each Governor and regional-Fed president at the Fed’s meeting two weeks ago. Seven of 17 are dug in: we’ve done too much, or the economy is okay, or there is nothing for us to do, anyway.
Analysts have struggled to quantify the housing “shadow inventory” and its effects ever since the market began to roll over in late 2005. The focus on delinquencies and future rate and amortization re-sets has missed the depth of shadows.
This inventory, in one stage of distress or disquiet or another, looks like Napoleonic infantry advancing slowly through fog, each rank harder to make out, the back invisible, one rank after another gradually coming into view.
The cannon fodder in front is in foreclosure, in the second quarter 4.5% of all mortgages (roughly 2.5 million of the fifty-million total). Right behind, scythed by canister, the 14.4% in delinquency.
The next ranks, formation ragged and intermixed with the front: the 11 million households underwater versus mortgage balances, and another 2.4 million with negligible equity (CoreLogic). Many, perhaps most of these households are not even delinquent, but can go to distressed sale or walk away at any time.
Barely visible, the unknown millions holding on but approaching the end of their resources. I think most of the people who bought homes they could not afford, and with suicidal mortgages, are already down on the field. Most owners were and are prudent, prepared for two or three or four tough years — but now many have had five since housing rollover, three since recession began, and see no end. There is no way to measure their resilience.
The rear ranks, invisible, innumerable, include all of those with equity, with jobs, with savings, and even the one-third of households without a mortgage. Some portion, perhaps one-third of the total, live in fortunate places. Values have held, and markets are liquid (the Great Plains, Colorado, Texas, greater DC and San Francisco…).
The other two-thirds, or half, tens of millions, are deeply unsure of their ability to sell their homes at a price consistent with life-plans: tuitions, retirements, and the ability to relocate to a better job. Some fraction is not uncertain about the discount necessary to sell, but fully aware and paralyzed by the thought.
These worried millions are not likely to go to fire sale, and therefore not part of the traditional definition of shadow inventory. However, their concern has caused them to withdraw from any consumption or risk-taking that would help the economy to recover, and their prudent standstill undercuts all of those at greater risk.
At this stage of non-recovery, it is amazing to find so many housing opponents so pleased, so you-got-what-you-deserved (blogger David Rosenberg in the lead). At least as amazing is the done-all-we-can from the Fed and Administration. Shrug and say “new normal.” Long, slow slog. Modest. And near the heart of the matter: cut off new credit to those who need it and qualify because too many who didn’t are defaulting.
I still have high hope that it will occur to the powers that a burst bubble is one thing, and a spiral into liquidation is another. Might do something about that.