Are banks inadvertantly financing the recovery?

Question

The government officials are taking credit for the great job they've done to get the economy crawling forward. Consumer spending and retail sales are up. But no one mentions where that money is coming from. It's not from jobs and investments.

There are 5+ million people not paying their mortgages and living rent free in their homes for an average of 1.4 years. Gee, $7-9 billion per month not spent on mortgage payments will buy a lot of cars, iPads, and beer.

Add to it that to banks these mortgage payments are revenue, so they're showing good profits. But these payments will never be collected!

I'm bearish until banks wake up and implement the TACT Program. They need to kick out the folks that default and sell the properties to qualified buyers.

Karl V. · Answer

I agree with Bill and Bryan.

I think that a lot of the so-called recovery we're seeing is election-year hype. Certainly in the housing market, the expiration of the tax credits has stalled the market and allowed prices to start falling again in many areas.

What really concerns me is the ever larger backlog of defaulted loans. To me, that is the key to this whole mess. Those houses need to be foreclosed and resold.

Seems to me that banks will start lending again once they have a stable portfolio. Once they start lending, there will be more buyers with financing and the housing recovery will begin.

Karl

Ron Nawrocki · Answer

Seems to me that banks will start lending again once they have a stable portfolio. Once they start lending, there will be more buyers with financing and the housing recovery will begin.

Agreed 100% ... but until the banks sell off most of those toxic assets they can't lend. 
They hold the key to fixing the housing market, but seem to keep waiting for a silver bullet out of Wash DC.

Bryan Hancock · Answer

It is funny you mentioned Kali Bill.  I am sure a lot of people are walking away from mortgages there after living in the house for a long time.  There is some stupid state law that makes all owner-occupied mortgages non-recourse...I think.  So other states with different laws on deficiencies get to pay for people in casino property states when people strategically default.

If the lenders were smart they would have charged enough to compensate themselves for the state-systemic risk.  MBS investors are easily duped by magical formulas that design away risk when it is masked by ratings agencies though and EVERYONE gets to pay for this stupidity.

The problem really is that we have:

1.  Holistic policies for mortgage debt that are mostly set at the national level

2.  State real estate laws with lenders that don't price risk properly

3.  Inept ratings agencies

4.  A lack of LOCAL small banks to finance things using prudent underwriting policies instead of large, multinational banks.  This is largely aided by gov-mint guarantees and a distortion of the cost of money such that it is more attractive to the average consumer than small bank debt

Again...there is plenty of blame to go around from all parties to these transactions, but absent government intervention and distortion of the free market there would be no crisis.

Bill Gulley · Answer

ROn, that's an over simplification and I doubt the numers are reliable. Most mortgage money comes from bonds issued and as Bryan mentioned, are holding up the capital requirements.

Mortgages in default are not shown at their face amount as assets.

As to people living rent free, there are deficiency amounts that will be filed and while someone in Ca, might live in a home for a couple years, that person would not be in a foreclosed property for more than 60 days in Mo. So, all 5 + million? I don't think so..

Sounds like something that Glen Beck would say, revenue is from an income analysis not an asset position. The income comes back as new loans generated, someone is buying the REOs that banks have and other makes are providing financing in that market. So while on one hand they write down the asset, income is up due to the refinancing demand as well as new originations. Apples and oranges.

As for retial sales being up, up over what base line, last year? That's not too hard to do. And the money comes from those with discreationary funds, from their jobs and investments...while millions are unemployed, not everyone is broke. SInce many retailers are slashing prices, there are some good deals out there, especially in durable goods.
I respect your opinion and agree that would buy a lot of beer, IMO, much of that doesn't mesh.

Bryan Hancock · Answer

The banks will sort through the mess in a matter of several years.  The banks are not financing the recovery...the MBS investors are financing the recovery.  Nobody trusts anybody anymore and that is what has everything stalled.  Until people trust one another again and the debt market is fixed there will be no recovery!

Are banks inadvertantly financing the recovery?

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