A Point of Maximum Vulnerability

When a home value drops below 75% of what is owed on the property, it’s a time when folks just think about walking away from their lenders a recent study, noted in the February 2^nd New York Times, concludes. “‘We’re now at the point of maximum vulnerability,’ said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. ‘People’s emotional attachment to their property is melting into the air.’” By June of this year, the number of homes that fit that category will be 5.1 million, 10% of all mortgages.

Even financial advisors are telling perfectly solvent homeowners that the better financial step under such circumstances is simply to walk away and stick the lender with the underwater property. It’s just when a home falls below a certain value, where it could take decades to recapture the high market value, advisors suggest that continuing to pay a mortgage under such circumstances is simply throwing good money after bad. The Times: “The difference between letting your house go to foreclosure because you are out of money and purposefully defaulting on a mortgage to save money can be murky. But a growing body of research indicates that significant numbers of borrowers are declining to live under what some waggishly call ‘house arrest.’

“Using credit bureau data, consultants at Oliver Wyman calculated how many borrowers went straight from being current on their mortgage to default, rather than making spotty payments. They also weeded out owners having trouble paying other bills. Their estimate was that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option as a strategic calculation.” You’d think that banks and other lenders would be sensitive to this predicament and voluntarily adjust mortgages rather than face a walk-away and the resulting abandoned and probably unsellable property, but stubborn lenders, living in a world of denial, believe that following this path would release a floodgate of homeowners seeking such an adjustment, which would erode their balance sheets and send them spiraling into the abyss of insolvency.

The reality is that most underwater mortgage-holders keep paying, and it would cost an unbelievable $745 billion to bring all the homes with values below their mortgages above water… not too much more than the 2008 TARP bailout. We can’t afford more of a deficit, but is particularly galling, as Wall Street financial institutions are pouring huge bonus pay packages into their revenue-producers coffers at an alarming rate, that America helped her financial elite but is completely unable to help the average homeowner (even excluding the subprime miscreants) bail out of an economic collapse actually caused by the same Wall Street predators who are amply rewarding themselves after their greatest financial failure. What’s worse, commercial real estate is already facing the economic onslaught of massive defaults, the next large shoe that is dropping.

The government is stymied, but this fact combined with unrelenting unemployment has raised the anger level of the middle class to the boiling point. “‘We haven’t yet found a way of dealing with this [residential mortgage problem] that would, we think, be practical on a large scale,’ the assistant Treasury secretary for financial stability, Herbert M. Allison Jr., said in a recent briefing.” The Times. The economic news suggests that the last Wall Street rally, celebrating the laying off of millions and the concomitant increase in “corporate efficiency,” was just a momentary rise in a highway heading down a steep decline.

With mid-term elections coming up, the party in power is looking at an awfully large group of seriously irritated voters who have their negativity squarely centered on incumbent politicians and the party that had the majority vote, filibuster-proof, and blew it with stupid self-serving votes, internal bickering, shameless favoritism, and a rather arrogant failure to listen to the people. If you can’t help us, but have no problem helping the rich get richer, stands the cry, why should we vote for you? As the voters hear the false message of unbridled corporate campaign contributions (thank you, Supreme Court)… and they might just forget that it was those voices who caused this economic mess in the first place and who really only want lower taxes and as little government oversight as they can muster; they really never did care what happened to the average American.

Little movements in the unemployment rates (January reflects a lower 9.7% jobless rate) are misread as progress: the statistics are misleading as folks settle for part-time work or give up looking for jobs altogether and are thus excluded from the unemployment number – there are still six applicants for every job opening. State and municipal governments are cutting benefits and raising taxes, schools at every level are contracting, and crumbling infrastructure further inhibits growth. As the stock market plunges to a 3 month low, maybe the financial hogs are beginning to understand that without Mr. & Ms. Average American having solid jobs and a decent home, there’s no real recovery without consumers!

I’m Peter Dekom, and I think we all better hang on for what might be around the corner.