Thursday, July 15, 2010

Who's Holding the Bad Debt?

Continuing our focus on the macro scale of the housing bust, let's take a quick look at what's happened to home values vs. outstanding mortgage debt. If you had any doubts about where the multi-trillion in Federal Reserve quantitative easing (money printing) went, or where the $0.8Trillion in TARP funds went -rest assured it did NOT go toward bailing out Joe Six Pack. It simply went to rescue the largest of large banks, executive bonuses, and their stock/bondholders.

"That is, what Americans' homes are worth, their equity, decreased by $7 trillion -from $20 trillion to $13 trillion-, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that's right: US homeowners lost more, by a factor of 26, than they "gained" through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333. Good morning America!!

And your own government is still trying to encourage home ownership? Now why would they want to do that in the face of numbers such as these? How much thought have you given that question? Over the past 4 years, the "right to own a home" has become synonymous with the "right" to lose some $25,000 a year. Why does Washington, through Fannie and Freddie, Ginnie Mae and the FHLB, continue to guarantee guaranteed losses for American citizens?"

As the graph above clearly shows, the vast majority of stimulus, bailouts, and fiscal/monetary policy response to the housing crisis did not go where it would do the most good for average taxpayers, voters, and mortgage holders. The largest of large banks have been made whole and are paying record bonuses, yet mortgage holders and taxpayers have been left holding the ever growing bag to foot the bill for the bubble.

Meanwhile, the future does not look so bright for the housing market. Most anyone following housing from ignorant novice to seasoned veteran knows that when sales volume dries up, there is trouble ahead regardless of the trouble already left behind.

"To summarize, all US banks would have lost money last year if it hadn't been for your taxpayer dollars, and, indeed, all but the 6 biggest did. They received many trillions in public funds, all of which are a loss to you, who have also lost those $7 trillion on your home values. The balance sheets of the big banks, however, still wouldn't look good even with all your funds; they need stupid accounting pet tricks for that. Just like the government.

The overall picture is one of a ridiculous patchwork of lies and tricks and fraud and ultimately for you, losses bigger than you can bear."

If you step back and look at the housing/real estate bubble on a macro scale, it should be clear to all who read here that we have a long long long way to go before all of this is resolved. It will be several years before housing prices are aligned with real wages in local markets. Until mark to market / fair value accounting is restored, one cannot believe anything the banks report on balance sheets or income statements. Nor can one really be assured of what a house or property is "worth". In so may ways, the housing bust of the early 21st century has only gotten started, and will only grow much more intense, interesting, and impossibly painful going forward.

Source #1: Michael David White

Source #2: The Automatic Earth