Aug212013

The biggest foreclosure myth of the housing bust exposed

The financial mainstream media often tells people what they want to hear. They’ve learned they make more money by providing emotional support to people seeking reassurance rather than providing facts and accurate analysis. This is a shame because people often make important and complex financial decisions based on erroneous or biased information they obtain from the financial press. When these investment decisions go bad, people are often wondering what went wrong. The problem is they trusted the veracity of what they read in the mainstream media.

We’ve seen a great deal of spin and nonsense over the last few years. Barry Ritholtz wrote a post on How to Read National Association of Realtors News Release. I wrote a series of posts on self-serving bullshit from the National Association of realtors. But this goes beyond the NAr. It’s a significant portion of the financial press. For example, watch over the next several months as home prices pull back. Each month, we will read about a month-over-month decline, but the reporter will reassure everyone the market rally is intact by pointing out the year-over-year numbers are still good. Are people so insecure that they need this constant reassurance? And when the assurance causes them to make bad decisions, who is responsible for that?

Today’s featured article contains a quote that outraged me, not just because it’s an inaccurate depiction of reality, but because the motivation for it was purely to make people feel good about something they didn’t do. A collective Kumbaya and fake praise based on a lie people want to believe.

Drop in foreclosure rate “heroic” on part of Americans, expert says

Amanda Cochran — August 15, 2013 11:49 AM

(CBS News) Home foreclosures dropped 31 percent last month, from the same time a year ago, new numbers released from the foreclosure listing firm RealtyTrac Inc show. But more importantly, 2013 is shaping up to have the lowest foreclosure rate in six years.

It’s part of a broader trend economists call “deleveraging,” in which debt is paid down by selling assets, Jon Hilsenrath, chief economics reporter for The Wall Street Journal, explained on “CBS This Morning.” He called the numbers “very significant,” adding, “Americans have done something heroic, really, in the last five years. Faced with all of this debt after the housing boom, they’ve made a lot of progress on paying it down. …

Complete and utter bullshit. I’m shocked he had the nerve to say it. Perhaps he figured nobody would call him out because his bullshit makes everyone feel good.

First, I would like to point out that one of our readers is a hero. Perspective really did pay down his mortgage debt by taking money out of savings. It was a difficult decision that required sacrifice, but he managed to refinance into a 15-year mortgage at a very low rate, and he is quickly retiring his mortgage debt.

That is heroic. That requires sacrifice. That isn’t what Americans have been doing.

Let’s take a look at the trend in deleveraging. The total debt is dropping, that much is true.

However, how do you think this really happened? Did Ponzis suddenly start making more money during the recession and pay it down with wage income. No. Did anyone liquidate their assets to pay off debt. Not very many. So what is the real source of deleveraging?

Bank write offs.

Nearly all the mortgage debt retired over the last several years was written off by banks.

Look at the astronomical charge off rates on credit cards. That’s what happens when millions of Ponzis all implode at once.

The same pattern is evident on all consumer loans (this includes car loans). The charge-off rates were more than double the highest previous rate seen at the end of the last recession.

All loans at all commercial banks. Just as bad.

Americans are some kind of heroes, right?

we’re seeing that in foreclosure rates … the rate of [banks] repossessing homes is coming down because household finances are in better shape than they were a few years ago.”

The layers of bullshit are getting thick. The foreclosure rate is coming down because banks stopped foreclosing on delinquent borrowers. They’ve gone all in on can-kicking loan modifications, and they’re allowing those who won’t agree to a modification to squat. The illusion perpetuated by the mainstream media is that “stuggling borrowers” can’t make their payments due to job loss. There are a few of those people, but many are Ponzis who overborrowed and became accustomed to fresh infusions of debt to sustain their profligate spending.

Different parts of the country will progress and regress at different rates, Hilsenrath said. “What’s interesting to me about the increase is we’re seeing a lot of them in the northeast. New Jersey, New York, Connecticut. So, it looks like that part of the United States is not doing as well in this recovery and in repairing household finances.”

Rather than admit that he has no idea what he’s talking about, he applies the same faulty reasoning to different conditions. The Northeast is suffering because they never did process their housing bubble foreclosures. Many of the states are judicial foreclosure which clogged up the courts, and others are overrun with delinquent mortgage squatters. They are just now processing the foreclosures we pushed through here in the Southwest years ago. Keith Jurow publishes great numbers on the debacle in the Northeast.

Though this year is a bright spot in the housing recovery, Hilsenrath said the next step is whether there will be a follow-through in the larger economy. He said, “The stage of the story (is) that Americans have repaired their finances. Are they going to start spending money? There’s this idea of the paradox of thrift. The idea that we’re seeing this from the households is they’re not spending a lot of money, so the economy is growing very slowly. So the big question right now is, do people start feeling better about their finances to start spending a little bit and getting the economy growing faster and creating more jobs? That’s really what we have to start seeing next — a faster growing economy, more job growth. That’s what will keep this recovery going.”

Is there any fallacy this guy doesn’t believe? There is no paradox of thrift.

Under normal conditions, however, the paradox of thrift does not apply:

  • If an individual saves they will increase their wealth;
  • If the entire nation saves, there is no effect on national income provided savings are channeled through the financial system into new capital investment.
  • All that then happens is less consumer goods but more capital goods are produced — spending as a whole does not fall.
  • Production, as a result, will also not fall.

National income is, in fact, likely to rise. New capital investment will boost productivity and accelerate growth.

Consider the simple example of a farmer who saves and buys a tractor. His overall spending is unaffected. He merely consumes less and spends the proceeds on something else — in this case a tractor. The income of the store that supplies him with consumer goods will decrease, but the income of the dealer that sells him the tractor will rise; the net effect on national income is so far zero. But the farmer now produces more food with his new tractor; so his income — and the national income — increases.

This misconception that the paradox of thrift applies in normal markets has done immense harm to the economy and eroded the savings of the middle-class and retirees. For three generations, central bankers attacked savers by artificially reducing interest rates — in the belief that lower savings would boost demand and stimulate the economy. Low interest rates simply forced savers to assume more risk, in order to earn a return on their investment, and encouraged speculation. The traditional work hard and save ethic that is the backbone of the capitalist system has been supplanted by the consume, borrow and speculate profligacy that got us into such a mess. High levels of public and private debt, inflation, volatile investment returns and rising income inequality are all consequences of the low-interest policy pursued by the Fed. Today’s giant casino is a far cry from the cautious, prudent investment outlook of our grandparents’ generation.

The economy will improve due to lower debt service levels — not because people become less thrifty, but because once they’ve paid off their debts, they will have more disposable income. An economy doesn’t require consumer debt or other artificial increases in spending to be prosperous. In fact, any expansion of consumer debt ultimately makes everyone poorer. An economy without consumer debt loses nothing to debt service. The money spent on interest and principal repayment on consumer debt is money not spent in the rest of the economy. That’s the dirty little secret bankers don’t want you to know.

A short sale for more than double their purchase price?

How do you think that happened?

[raw_html_snippet id=”newsletter”]

[idx-listing mlsnumber=”OC13156890″ showpricehistory=”true”]

332 EVENING CANYON Rd Corona Del Mar, CA 92625

$1,550,000 …….. Asking Price
$780,000 ………. Purchase Price
2/7/1996 ………. Purchase Date

$770,000 ………. Gross Gain (Loss)
($124,000) ………… Commissions and Costs at 8%
============================================
$646,000 ………. Net Gain (Loss)
============================================
98.7% ………. Gross Percent Change
82.8% ………. Net Percent Change
3.9% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$1,550,000 …….. Asking Price
$310,000 ………… 20% Down Conventional
5.02% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,240,000 …….. Mortgage
$324,813 ………. Income Requirement

$6,672 ………… Monthly Mortgage Payment
$1,343 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$323 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$53 ………… Homeowners Association Fees
============================================
$8,391 ………. Monthly Cash Outlays

($1,943) ………. Tax Savings
($1,484) ………. Principal Amortization
$606 ………….. Opportunity Cost of Down Payment
$214 ………….. Maintenance and Replacement Reserves
============================================
$5,784 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$17,000 ………… Furnishing and Move-In Costs at 1% + $1,500
$17,000 ………… Closing Costs at 1% + $1,500
$12,400 ………… Interest Points at 1%
$310,000 ………… Down Payment
============================================
$356,400 ………. Total Cash Costs
$88,600 ………. Emergency Cash Reserves
============================================
$445,000 ………. Total Savings Needed
[raw_html_snippet id=”property”]