What Housing Recovery?


Allegedly, we are in a housing recovery.  About as recovered as the house under the uprooted tree in the picture.

In reality, the mortgage debt that has disappeared has been discharged in bankruptcy cases, both Chapter 7, and Chapter 13 payment plan bankruptcies, in which second mortgage liens have been stripped completely.

And, other debt the mortgage companies have simply charged off, written off, and are not chasing to collect.

Now, I see the underbelly of the economy all the time, being a bankruptcy attorney.  I know the mortgage companies are slow to foreclose.  I have blogged about shadow inventory before, the homes the banks already foreclosed and own but have not put up for sale yet, because of the law of supply and demand.

The more houses up for sale, the lower the price will go.  Being that mortgage companies own so damn many houses these days, they are interested in keeping, or getting, prices up.

Even I was surprised to learn how bad things really are.

 the total change in mortgage debt, and what portion of it is due to discharges (aka defaults) of 1st and 2nd lien debt. In a nutshell: based on NYFed calculations, there has been $800 billion in mortgage debt deleveraging since the end of 2007. This has been due to $1.2 trillion in discharges (the amount is greater than the total first lien mortgages, due to the increasing use of HELOCs and 2nd lien mortgages before the housing bubble popped).

reports Tyler Durden at the site linked to in the quote.

Just more of our Alice in Wonderland World.  Defaults are spun as the same as paying down mortgage debt.

Wiping out hundreds of billions of mortgage debt is treated the same as if that debt were paid.  Sick is healthy.

Leveraging is part of what got us into this mess.  It allowed the speculators to multiply their bets on mortgage securities tenfold and more, with options and other tricky investments.   It increases profits on the way up, just as it increases losses on the way down.  If the government has not bailed you out for being “too big to fail.”

“Deleveraging” is good, actually, and presumed so here, in that the less debt consumers have, the healthier the economy is, and will get.

Except not.

From the same Tyler Durden article:

Lately there has been an amusing and very spurious, not to mention wrong, argument among both the “serious media” and the various tabloids, that US households have delevered to the tune of $1 trillion, primarily as a result of mortgage debt reductions (not to be confused with total consumer debt which month after month hits new record highs, primarily due to soaring student and GM auto loans). The implication here is that unlike in year past, US households are finally doing the responsible thing and are actively deleveraging of their own free will.

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