Tuesday, June 1, 2010

Squatting our Way to Prosperity?

Hope everyone had a safe holiday. Stocks fell sharply today despite positive US economic numbers as the headlines around the BP oil crisis and political instability in the Middle East sent investors running for cover.

I wanted to talk more about housing and the consumer tonight. I have been surprised at the resilience of consumer spending as the economy deteriorated in 2009/2010.

I had suspected a few months ago that this consumer spending rebound could be nothing more than a "squatter bounce" as borrowers stopped paying their mortgages after realizing that didn't have the ability to pay the mortgage back.

The result of such actions would put an extra few grand in most families pocket each month. The effect of such newfound wealth would then have an extremely positive effect on consumer spending since we all love to spend like drunken sailors in this country.

Turns out this may be exactly what is going on:

"A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.

“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”

Foreclosure procedures have been initiated against 1.7 million of the nation’s households. The pace of resolving these problem loans is slow and getting slower because of legal challenges, foreclosure moratoriums, government pressure to offer modifications and the inability of the lenders to cope with so many souring mortgages.

The average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier"

My Take:

All I can do is chuckle after reading this. Folks, this "walking away/screw the bankers" mantra is one of the unintended consequences that I have warned about on here for over 2 years.

Borrowers have simply run out of options:

- They can't afford to short sell the house because they don't have the cash to do it.

- They also finally realize that they can't sell the house for what they paid for it as they watch prices continue to free fall all around them.

- Finally, they can't continue to pay the mortgage because they could never afford the house in the first place.

So what's an insolvent home owner to do? You take the only option left which is to just simply stop paying the mortgage.

This option is becoming a much easier route for more and more borrowers as the anger against Wall St increasingly turns into a full blown raging hatred for bankers.

The sheeple are finally realizing that they have been "fleeced" by the banksters. As their anger against Wall St continues to escelate month after month, they now feel less and less guilty around making the decision to stop paying their mortgage payments.

As you can see by the numbers above, there is nothing that Wall St can do right now but sit down and take it. They have no choice. They can't take action against the squatters and foreclose on the house because they can't afford to take the losses on the all of these foreclosures.

The only option the banks have is to slowly puch them out on small pieces. This is a better option for a myriad of reasons. It allows them to slowly absorb the losses and by keeping the number of foreclosures to a minimum it helps prop up prices.

As a result, the average amount of time spent in foreclosure before being kicked out has soared to 438 days vs. only 251 days in early 2008 as seen above.

More than 650,000 homes are now 18 months deliquent on paying their mortgages.  This is DOUBLE the rate from a year ago.  All I can say is.. OUCH! Houston we have a problem!!!!

I expect this number to continue and soar now that the borrowers see that Wall St is forced to let them live there for free for a good 2 years or so. I mean think about it! It's their only option for the reasons I described above. They must let the squatters squat!

They risk their own solvency if they take action against all of the "deadbeats" at once. I find it ironic that the demise of Wall St could very well be triggered by the average middle to upper middle class that they have been fleecing for decades.

The early reprocussions of such a "squatting boom" has triggered a nice pop in consumer spending. I must say thought that it's a shame that these people are pissing it away on trips to Disneyland instead of saving it as we all prepare for the oncoming depression.

Perhaps many of them are pissing the money away now because the laws in many states protect creditors which gives them the right to seize any cash and assets from those who defaulted on their loans.

The Bottom Line

The "squatter syndome" is a very alarming trend that appears to have legs. Anger towards Wall St continues to mount as the economy remains in shambles. As the "debt slaves" in this country continue to lose their jobs and run out of options, it will increase the risk of them taking out their anger out on the banks by "walking away" from their debt payments.

Making matters worse is the fact that the borrowers now realize that Wall St can do nothing about it if they decide stop paying. This will only embolden others to do the same.

The "uninted consequences" of such actions could potentially be catastrophic because none of this cannot be sustained.  The banks will eventually run out of cash flow if they don't foreclose on bad loans.

One point should be made very clear here: The housing market is extremely distorted right now because millions find themselves stuck in their homes.

There has been no true price discovery in real estate as a result because people cannot afford to sell at the prices they need to and the banks can't afford to foreclose.

Prices in real esxtate cannot be trusted as a result because the real correction has not been recognized.

I will talk more about our ongoing correction tomorrow. There are many risks to the downside that are putting pressure on stocks.


getyourselfconnected said...

I am so glad this story is getting good coverage. The time periods living payment free are astonishing.

jeff said...

I know

I wanted to do a thing on the oil spill today but I couldn't get away from this article.

getyourselfconnected said...

"Just when I think I'm out, they pull me back IN!

CT-Hilltopper said...

So, if this story is getting coverage, and everyone knows the banks are doing this now...where are the prosecutions?

The banks are committing fraud. Someone should be grabbing them by the short ones and making them do the right thing.

Things are going to collapse anyway. It's easy to see that now. It was easy to see that when the first subprime mortgage thing exploded. The banks should have been forced to come clean, no bailouts, no TARP. It would have been hard, but it's going to be much harder to pull out of the mess we are in now after having thrown trillions of dollars at it.

All of the numbers that the government put out are illusions. Nothing has changed. We are still down at the bottom of the hole, and we're still shoveling.

We're burying ourselves.

Herb said...

I can't absolve all of the borrowers from complicity in the great housing game. A lot of home owners were just very very greedy and walked away with lots of money and toys.

jeff said...



Unfortunately FASB is letting them get away with it.

They are allowing them to hold these garbage loans at par without consequences.

Like Enron, this works until you run out of cash.

The hits must be taken but they are in no rush because there are no consequences.

The problem is there are unintended consequences of policy like this where everyone stops paying their mortgage because there are no consequences.

This housing crisis is getting worse and worse by the minute.

This article was horrifying because the sheeple are waking up andshoving these loans up the banks you know what.

If this trend continues then its lights out.

The only way anyone could afford these loans was via a teaser rate via various ARM's and subprimes.

Hardly anyone could afford these loans when they reset. Its bad and its going to get worse as these 5 year arms start to reset.

ARMS were done because the borrowers couldn't afford to buy the house in the first place.

The idea was to buy it and sell to a greater fool at a 20% premium before the loan reset.

Like any Ponzi scheme this works until you run out of fools.


jeff said...


Yup the speculators are at fault too.

There is plenty of blame to go around. WAll St unfortunately led the sheep to slaughter like they always do.

flipdippy said...

here's my concern - the places this is happening can be counted on 1 hand: california, florida, las vegas, arizona, and atlanta.

At this point, the problem is no longer the banks. As much as they can, they've transferred risk to the government. The regionals and community banks are royally screwed. GS or JPM or BAC have the reserves to cover their losses, they're just putting off recognizing those losses until they absolutely must.

If someone in DC or Baltimore thinks they can stop paying their mortgage and they'll be in their home rent free for 1+ years, they're sadly mistaken.

So, I still don't disagree, but I see no reason why the sky is falling now or why this is the big one. One thing I feel the elliott wavers got right is the idea the big leg down won't start on negative sentiment, and right now, people are way too negative.

The foundation can rot away longer while the party rages on, IMO.

We'll see!