Wednesday, March 17, 2010

Misallocation Central

I am going to lay out in broad strokes an important phenomenon I believe is going on in the financial markets and economy. INTELLIGENT, well reasoned comments are requested.

The number of mortgages that are in default is X% of the total number of mortgages (comments and data points are welcome here), but the US$ value of mortgages in default is a higher percentage than the number. In other words, higher dollar mortgages default more often than lower dollar mortgages. The number of people living in homes in which they are no longer paying a mortgage, property taxes, or insurance on is - I BELIEVE - a very significant number. There is no reliable data point for it. I am speaking from my own anecdotal experience. If I am correct, these people have experienced a windfall in disposable income. If my assertion is correct it would make sense that these people not be terribly interested in saving money that will be seized later in bankruptcy or in a lawsuit to recover unpaid mortgage debt.

Since the banks are not writing these debts off and marking to market BUT the mortgagor (borrower) IS... and is spending the money accordingly... this would be enormously stimulative in the short run... and a terrible precedent.

It would be reflected in the economic data as a no harm/no foul to the financials because they are not marking these losses to market, and the other side of all of this largess does reflect it in the form of increased spending and consumption.

Any data points or opinions would be appreciated.


Anonymous said...

Greg, I have been following these numbers particularly because it impacts my business directly.

Coming from reported First American Corelogic came up with these numbers,which are what I have been seeing else where. This article is from 3/10/2010.

1) 11.3 million mortgages under H2O in 4th qt. of '09

2) Which is 24% of all home mortgages in us,or 44 million +/-

3) Mortgages with less then 5% equity are additional 2.4 million

4) That is 3 of 10 homes have no financial value

5) Morgage bankes Assoc. says 15 % of all mortgages in default or one payment behind

At interveiwed the VP of Realtytrac in Jan. '10 claims that we shall see the 3 rd wave of this crisis later in '10 when opt arms reset.

According to US census 67.8% of households are home owners.

I can imagine with in the next year or so most of these none payers will have to start paying, so much for that excessive $.


Greg T. Jeffers said...


I am trying to determine its past effect, and hence its future effect when it is no more... I hope that made sense... anyway...

What I am trying to determine is this:

How many homes are being lived in by folks NOT paying the mortgage - getting the mother of all free rides, as it were. AND.... what is the average and/or median balance (median is better).

Any help you can be will be greatly appreciated.

Anonymous said...


Okay, more pieces to the puzzle:

LA Times reported via Rick Sharga of RealtyTrac

90 days or more of no pays is at 5.1 % nationally, 2.9 million forclosures for '09, less then the 3.2 million RealtyTrac predicted.

ForeclosureRadar says it takes 229 days to foreclosure on homes in California,up from 146 days in Aug.08.

I suspect the worse the rates are in each state,city may dictate the amount of time for these forclosure to proceed. It seems banks are giving every chance they can to keep people in thier homes so as to allow the barrower to get caught up or at least keep vandalism minumal. At least thats what is being written. In states with extremes such as Michigan, California,etc this is truer then in states with stable real estate. Also, banks with better leverage most likely are running these forclosures quicker.

This is a tough call on a solid number,however, if nationally the rate is 5.1% for 90 plus days, then California is double that and the amount of time as well.IMHO. Either way those state hit hardest by the downturn are only going to feel the pain that much worse then this is flushed out,and the S.O.L. continues. I am sure that your request is possible, just has to be done at micro level ( city,state,subd.,etc ), this may have to balanced with the renter numbers,since some of those evicted may get in to a renter property before their credit is destroyed.


Anonymous said...

I believe Diana Olick reported on CNBC earlier this week that 7.5 million home mortgages are delinquent or in foreclosure and of those, 24% have been so for over a year. She did not mention the monetary value of these mortgages.

Anonymous said...

Well, I must have heard wrong on the Diana Olick interview. Hear is the article with her official stats. Hard to glean the information you are looking for from them.

Check article here.

Anonymous said...

California case study(IMHO);

For 2009

1) 632,573 foreclosures

2) average resale was $ 174,408.,
13% decline in home prices from just under $200,000 in 2008

3) monthly payment on $200k at 5% with 1.25 % property tax is $1362. with $ 208 that going to taxes

4) average days to foreclosure was 229 days or 7.5 months

5) the math

7.5 x $1362. = $ 10,215. x 632,573 = $ 6,461,733,195. total loss during foreclosure process.

6) of that taxes are $ 986,813,880. not being paid

7) sales tax is 8.25 % on $ 6,461,733,195. = $ 533,092,988.

This is of course says that the defaultor is spending entire mortgage on other, in fact they are spending a bit less otherwise the home would not be forclosing on.

However, credit card use prior to the default may spike, also, strategic walkers may become bigger player soon.

What is more assured is the property tax decline.


Stephen B. said...

I guess what I'd want to know regarding the increase in disposable income is how many of those people no longer paying mortgages still *have* an income at all?

But yes, IF they have income, and it's no longer going to mortgage payments, then there is a windfall.

We need income/unemployment data on these delinquent borrowers I should think.

Donal Lang said...

Good point. This extra cash is either going to get spent (stimulus) or be hidden away somewhere. If its spent, I'd guess some of it will go into portable and hideable wealth like gold.

How many people have to go bankrupt before The System can't process them? And if they fall out of The System; taxes, proper jobs, healthcare etc and work in the Black Economy, how will the Gov't ever get them back into the taxpaying system?

And if enough of the population have financial crises through this recession, will records be effectively wiped clean by banks after its all over, just to have someone to lend to?

K said...

The government doesn't need to get them back in the tax paying system. The government could have them declared enemy combatants, then have them detained in detetion facilities (work camps) and use them as slaves. Those that resist are obviously terrorists and thus can be terminated with extreme prejudice.

Lenny said...


That is huge. Just like the equity extraction of '04-'08 drove the economy, this is the same thing.


Donal Lang said...

One thing which would probably never happen in America: if the States bought all these houses being reposessed and rented them back to the current or other occupants, they could have stabilised the housing market, rescued the banks, kept families in their homes, jobs and societies and done some social good too.

In the UK the Gov't supports Housing Associations, social landlords, who have recently been buying up the remainder of developers unfinished housing schemes, getting them finished and renting them out at moderate rents. This has acted to stabilise the markets (although I have many arguments against how they'vegone about it).

Sometimes politics gets in the way of common sense!

indigoboy said...

I think your interpretation of this phenomenon is probably spot on. And it’s a paradigm shift of the highest order. I’d take it further and say it's probably a cultural shift that has implications not yet grasped. Let me try to explain.

When a number of people decide to go in a different direction to the one expected, they anticipate there to be consequences. BUT, if that number is sufficiently large, the sheer weight of numbers make the consequences less likely. This is the basis of protection in a Workers Union. Also a more recent pastime is the illegal downloading of music and films. People know it’s wrong, but the sheer weight of numbers doing it, makes it impossible to monitor, police and frankly do anything about it. Much to the angst of Record and Film Companies.

Let me take what you have identified, and push it further upstream.

After the financial crash of Oct08 they did an Alt+Ctrl+Delete , and called it Q.E.
Quantitative Easing is their way of saying we're printing money, or more likely creating digits on a screen to represent new money.
Let’s call it what it is. Quantitative Easing is pretend money.

Quantitative Easing is a way of creating ‘make believe debt’, in order to fill the void of the ‘make believe wealth’ that dissolved on October 2008. Why else would they refuse to tell us where all the QE money went? And why would they be so sanguine about the risk of hyperinflation. Maybe it’s because a newly created (QE) dollar is simply replacing a dollar that got vaporised in Oct 08. Hence there is no inflationary risk, and they can’t tell us where it went, because it didn’t really go anywhere. It is fantasy debt, filling a hole left by fantasy wealth.
In short, what they are trying to do is foist their lost wealth on to us and our children, in the form of a newly created phantom debt. The real trick is making us believe it.

And here’s where we come back to your identified phenomenon.
Two years ago they turned to us and said “We are too big to fail”.
What if,.... Just what if Joe public en mass, turned around and said “ Your Quantitative Easing is too big to pay”?

Anonymous said...

Not quite on topic, but you might want to also factor in the effect on the consumer aspect of the economy as HAMP modifications expand.

Here is nice anecdote from the Calculated Risk Blog.

Check into HAMP too?