Mainly buried in the financial press today is an item that should be of far greater interest to policymakers and activists, namely, that foreclosures are up in a big way, worse than in the first quarter of 2008. This is not just another bad tick in the unending stream of "indicators" we seem to await, breathlessly, each week (or "session" as the traders call it). What it means is that the average person has not caught a breather, regardless of the current stock market "rally." Worse, this high rate of "regular" default is likely to soon be compounded, as was warned in some corners of the business press but not so much in the mainstream media, by a second wave of more exotic foreclosures, and financial distress.
Unlike the 2006-08 foreclosure crisis, which had a high component of subprime mortgages, the salient points of this wave will be (a) billions of dollars in option-ARM mortgages re-setting in 2009 and 2010, and (b) a crisis or even collapse in commercial real estate.
Foreclosures for most of us are something that happens to someone else, but they're a bad thing for us all. They destroy wealth, transfer property ownership to banks, reduce balance sheet values, and have negative ripple effects throughout the economy, including neighbors' properties (more so in condominiums than in single-family-home neighborhoods). They can be horribly disruptive to innocent bystanders, such as a responsible renter of a condominium unit who now faces eviction, or condominium association members who not only have to pick up the slack for an owner not paying assessments and fees, but may have to pay a lawyer to follow court proceedings. Foreclosure is a pretty good sign of a consumer (or, in case of commercial real estate, individual or corporate owner) who will not be pumping much cash into the economy, and whose problems create new problems in turn for creditors and others.
The coming wave of foreclosures will also add to the existing huge inventory of bank-owned properties. As reported in the San Francisco Chronicle a week ago, lenders nationwide are "sitting on" up to 600,000 foreclosed homes that not only are unsold, but in many cases are not even listed for sale; thus the reported high inventory of homes on the market actually seriously understates real home-sales backlog, and ultimately these warehoused properties will be "a major factor driving home values down."
The ongoing march of foreclosures should re-focus our attention on fundamental problems with the economy. "Liquidity" was and is only part of what contributed to last fall's meltdown, and was never the fundamental reason folks were defaulting. People will pay for their home if at all possible; they are defaulting because – shocking news – they don't have enough money. When the U.S. economy is shedding 500,000, 600,000 jobs month after month, increasing defaults are inevitable. One wage-earner in the household losing a job is a far more common cause of household financial crisis than some sort of moral failing. The #1 cause of economic hardship -- and what drives more people into bankruptcy than anything else -- is unexpected medical bills.
The markets have been rising more on technicals -- what looks more like a "dead cat bounce," a correction of overpunishment of the tech sector, and the need for cash-on-the-sidelines to create some action -- than on any real change in the fundamental problems with the economy that sparked a fullblown crisis in 2008. In many respects, things are worse for the average person. One has to question the strategy of government giving money to financial institutions, then crossing its fingers and hoping, asking, pretty please, that the banks will lend.
A lot of the lending action we're seeing right now is re-financing, which will salve some borrowers facing impossible re-sets. But a loan is not a gift. A patched tire is better than a flat for getting across a bumpy road, to be sure.
Fixing some of the extreme imbalance in wealth and income created over the past quarter-century in America requires evaluating distributive effects. If, ultimately, the problem is that too many people just don't have enough cash, putting people deeper into debt, whether on an individual basis through loans or on a societal basis through the mad printing of money, makes less sense than simply getting folks with no money some more of it. And, even if addressing debt via more lending (of borrowed mony) were the answer, loaning the financially struggling money directly might be more efficient than giving it to the banks. Filtering the money through the same institutions that helped cause the crisis increases their revenues by way of fees, but doesn't make assets held any less toxic, nor make the average American any more well off.
The point of this diary is not to gloom-and-doom the markets. The point is to be thinking about bigger-picture solutions now, so that after a little repair to battered 401k's we're not all sandbagged by another crisis in a month or six that derails a critical debate over health care or climate change policy. It's also to underscore that policy based on trying to return to the unsustainable spirals of the last 10-20 years is not only unlikely to work, but probably wrong-headed to begin with. We need to stop propping up our fails, and fix some fundamentals.