The Coming Foreclosure Tsunami & Our Elected Madhatters

mad-hatter-1Was away for a few weeks for work and took a short vacation.  Let’s get back to it…

There is an excellent post on a blog I have been following for years, the Irvine Housing Blog.  The IHB has been one of the best, most widely followed housing blogs I have ever seen and I’ve been reading housing blogs since the early days of 2004 when this circus got started.  The post I am discussing today doesn’t tell me anything new, the IHB and other blogs have been predicting the coming foreclosure tsunami for quite some time, but it does reinforce what many of us have seen for the future.

For my own sanity, I like some reinforcement from time to time.  I was one of the few people back in the frothy days of flipping and “they can’t make any more land” and “real estate always goes up” and “you better get in now or be priced out forever” that was warning of the coming collapse in the housing market.  When you are the only one standing in front of a tidal wave of crazed stampeding home buyers tripping over each other to pay as much as possible, it makes for an uncomfortable experience.  Friends thought I was crazy, family treated me better by just nodding.  So even though the bubble burst has come to pass, there is still a significant amount of information circulating on the web, from the same trusted sources, that are predicting some pretty serious consequences still hanging out there in our future.  I call where we are now, the “eye of the hurricane.”  It’s only a matter of time before the other side of the storm starts battering us again.  So once again standing in front of the unstoppable freight train of blue skies ahead, grass roots and hugs all around – I like to have my unfortunately pessimistic, yet realistic view of the future reinforced.  I want the party as much as everyone else, I just don’t want the hangover.

There are two serious situations still in the pipeline; the first is from the Mad Hatters in the government printing enough currency to create an inflationary cycle the likes of which have only been seen in small African fascist states that nobody knows how to spell and doesn’t bother to learn because we assume they won’t be around long enough to matter.  The second is what we call, “shadow inventory.”  This inventory is made up of homes that are anywhere in the year long process of being foreclosed on.  As some of you may know, various local, state and government agencies around the country, the “Masters of the Universe” that they are, have passed different types of foreclosure moratoriums.  These efforts have only kicked the can down the road.

It would be like someone telling you that you don’t have to pay any of your bills for three months…not your utilities, your gas bill, your rent, cellphone…nothing…for three months.  So for three months, all of these companies (the utility company, your landlord, etc…) report that they are not receiving any late payments which looks like the government came to the rescue and all is well!  The media gets on the 6 o’clock news and reports that rent and utility late payments are way down, that the crisis is over, that the green shoots are appearing and that all is right with the world.  It’s time for us to join hands and sing kumbaya and profess our brotherly love for each other.

In reality…the bomb is ticking away.  The three months pass and all of those bills come due, including the amounts you owed for the three months moratorium…are you any better off?  Did you save anything by getting a 90 day bill-paying break?  No…the inevitable was simply delayed.  In one burst everyone who was spared from making payments has to face their mailbox again.  The mortgage is due.  Maybe they can make one more payment from the three months of time they had to save…but then the next payment is due, and the next…and they are back to where they started.  Not making payments, trying to renegotiate the loan on an upside down mortgage.  Nothing has changed.  The inevitable is here.  Foreclosure.

Various Government agencies will attempt to extend moratoriums, create new ones, force the banks to slow the rate of foreclosure…but all of these maneuvers only reinforce the notion of what kind of government we have…one that bases their course of action not on what needs to be done, which is sometimes painful but necessary, but on what secures them more votes, what sounds good to say in front of a microphone, what looks good on paper but doesn’t work in reality…they want the soundbite, the photo op, the illusion of doing something when everything they do does nothing or makes it worse.  Smile for the camera baby, it’s time for re-election!

Consider your own life.  Haven’t you ever had to make a decision that would come with some short-term pain based on some long-term gain?  Consider dieting, we turn down that ice cream and suffer for it in the short term so we can be healthier in the long term.  We trade in that five-star hotel on vacation for  a four-star.  We put a percentage of our income into a 401k when we would much rather spend it as soon as we get it.  We teach our kids to save up for their first car.  We study instead of party before the final.  We wear uncomfortable seat belts.  We put on sunscreen.  We make thousands of decisions that take something away from us in the now, to help preserve something for us in the future.  When has the government ever done that?  How is it possible that every government course of action has only beneficial affects for all of us, it’s always all upside, no downside.  That is impossible.  We know it to be impossible because we live that impossibility every single day.  You have to question a government who only brings to you upside solutions.  The truth is, they can never offer you a downside solution, no matter how well is solves the problem – because the first politician to do that would be voted out of office.  That is the sad truth of it…the first politician who decided to tell the people the painful truth, about anything, would disappear at the next election.  It is for that reason, among others, that we deserve the government we have.  We too must be willing to face the truth, no matter how painful.

Back to shadow inventory.  Moratoriums have simply delayed the next wave of foreclosures (and the end of the first wave from last year) that need to move through the market.  Those following the recast schedules for mortgages (mortgages with adjustable rates that are resetting to new, crushingly higher levels of interest rates) know that the second wave of recasts is moving through the system now.  Due to the one-year lagtime of how long it takes to move from missing your first mortgage payment to having the bank sell the house, we are looking at a second tsunami coming to an economy near you.

According to the IHB, the peak of the shadow inventory would hit in the winter of 2010.  That means at least another year from that point for that inventory to move through the pipeline of late payments to foreclosure.  Economics is not an exact science, which a lot of people who don’t like economists like to charge us with.  Since we can’t predict with accuracay what day something will happen, they believe the entire concept of economic theory is useless.  However, economics is the science of predicting fairly well the direction of something, but not the timing.  Timing is affected by all manner of things including political photo-op engineering like moratoriums and unforeseen shocks to the economy such as a terrorist attack or a hurricane like Katrina.  However, economics is like volcanology…both sciences can cite overwhelming evidence that a particular event has a significant probability of happening…but neither of us can tell you exactly when.  Just the same, I’d start making my way down off the volcano.

Shadow inventory also includes bank owned inventory they are not releasing into the market.  If you are a bank with 30 bank-owned properties in a development of 100 homes, the last thing you want to do is flood that development with foreclosed properties which will not only drive down the value of the surrounding properties but now create a local market in which you are competing with yourself because so many foreclosure properties are available at one time.  In would be wiser to release one property here, another there, and attempt to keep the local market home prices artificially inflated hiding the true value of these homes by restricting the amount of foreclosed inventory that really exists.

So between moratoriums (which just delay the inevitable foreclosure), current and quickly growing shadow inventory, government programs to assist troubled home buyers (only 7% effective to date), bank owned but withheld from the market REO’s, a second wave of recasts about to slam into our economic shores like a hurricane and climbing unemployment (can’t pay the mortgage without a paycheck), there is a significant wave of new foreclosures about to overtake us.

Please proceed to higher ground.

Categories: Housing Market

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