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It could be even worse. When one aspect of GDP grows significantly, it lifts other components that might not otherwise rise; this is known in economics as the “slingshot effect.” Without the temporary, distorting aid of Obama’s programs, the economy might have seen continued negative growth. Even Christina Romer, chairwoman of the White House Council of Economic Advisers, admitted in a statement accompanying the release of the third-quarter numbers that without the extraordinary government intervention, “real GDP would have risen little, if at all.”
This is not real growth. It’s the national equivalent of a credit-card buying spree, with the bills—in the form of debt service and unfunded liabilities—to be paid off later. It is a faux recovery.
The president is betting that private-sector consumption will take over for fiscal stimulus as the main economic driver in 2010 and beyond. This gamble fails to take into account the ways in which the band-aid rescue programs are delaying efforts to address the economy’s deeper problems.
As Goes Housing, So Goes the Economy
Like unemployment and GDP growth, the housing market seemed to show green shoots in early 2010. Housing starts were up 22 percent from January 2009, and the Internal Revenue Service estimated that 1.4 million taxpayers used the First-Time Homebuyer Credit to buy a new house between February and September of 2009.
But there is still significant rot at the roots. Tom Zimmerman, a managing director at the commercial banking giant UBS, predicts troubles ahead. “The housing market has a lot of wood to chop to get through this cycle,” Zimmerman said in October 2009 at an American Enterprise Institute event. “We’re not over by any means in terms of the negative part of the housing market.”
One of the looming negatives is the continued rise of mortgage delinquencies. Going into 2010, one-third of all homeowners owed more on their homes than they were worth. This phenomenon has led to record levels of home abandonment. Coupled with high unemployment and ballooning adjustable rate mortgages, banks are seeing defaults rapidly rising (see Figure 2). If delinquencies continue to rise at their current rate, we could see more than $300 billion in delinquent mortgages by the summer of 2010. The most recent housing data shows 6.25 percent of U.S. mortgages are 60 or more days past due, up 58 percent from a year ago. Why keep paying for your home if you’re going to lose money on the investment?
Some analysts will counter that the trend lines are improving, since the growth in people falling behind on their mortgage was only 7.6 percent from July to September, down from 14 percent in the second quarter. But Wells Fargo’s Silvia disagrees. “Delinquencies and foreclosures traditionally lag the economic cycle,” he says. “We’re likely to see delinquencies continue for the next three to six months. In some areas it might be nine months to a year.”
A possible reason for the delayed reaction is the high concentration of delinquencies in a few areas of the country. According to the Federal Reserve Bank of New York, as of September 2009, 31 percent of homes in foreclosure are located in five states: California, Florida, Nevada, Arizona, and New Jersey. This concentration creates massive headaches for banks trying to recover losses on mortgages gone bad, since what they need most of all is for the foreclosed homes to sell. Not only is selling difficult in areas with high foreclosure rates, but when a market appears prices tend to be disproportionately low—even considering the homebuyer credit—meaning less money recovered by banks.
These numbers, bad as they are, still don’t reflect the full depth of the toxic mortgage problem. In most states, the mortgage holder can legally foreclose on a home once the homeowner is more than 120 days late on payments. But banks and other mortgage owners have refrained from pushing delinquents into foreclosure. While the number of homes delinquent for 90 days or more increased by 2.9 percent in 2009 over the previous year, the number of foreclosures increased only 1.3 percent.
This divergence is a historical anomaly, according to Molly Boesel, senior economist for the property information and analytics firm First American CoreLogic. Delinquency and foreclosure rates traditionally track. “These mortgages should be moving through the process, but they are being held up for various reasons,” Boesel says.
One reason is that many banks and mortgage servicers don’t have the capacity to digest the foreclosures fast enough. But the main reason is that some mortgages from this pool have been modified or refinanced to keep the delinquent homeowner under the same roof. The bulk of mortgage alterations have been funded through the White House’s $75 billion Home Affordable Modification Program (HAMP). By the end of 2009, 130,000 mortgages had been refinanced through HAMP, and more than 700,000 other mortgages were being processed.
The chief problem with this approach is that the average redefault rate for HAMP participants, according to a September report from the Treasury Department’s Office of Thrift Supervision, is a wretched 50 percent. At the behest of the federal government, banks are lowering their lending standards for their least credit-worthy customers, and the results are predictable. Meanwhile the political pressure to prevent foreclosures continues to increase: states, counties, and cities across the country have ordered foreclosure moratoriums, limiting the legal authority for banks to move against nonpaying homeowners. These laws have merely postponed the inevitable, artificially propping up prices and preventing a real market from emerging in both housing and mortgage finance.
The Obama administration and Congress keep putting off the day when the housing market, the root of the economic crisis, gets cleaned out. It will be difficult for a real economic recovery to take off until they stop.
The Banking Mess