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Thread: analyst figures out where the renewed consumer spending is coming from ...

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    Default analyst figures out where the renewed consumer spending is coming from ...

    (snip)"The consumer is dead… Long live the consumer!

    We’ve faced some very bipolar news on the US consumer over the last two years. With the unprecedented turmoil in the markets, a real estate market that remains depressed and illiquid, unemployment stubbornly high, and shaky financial ground to begin with – most analysts (myself included) completely discounted the consumer’s ability to spend.

    Since consumer spending is known to account for roughly 70% of GDP, this has not been good news.

    But with all the headwinds, and with all the negative publicity… the consumer, it appears, is beginning to step up to the plate and once again spend us into recovery.

    It should be considered good news, I guess. After all, numbers don’t lie and the statistics point to a relatively strong consumer with money in his pockets (or maybe plastic) and a list of wants akin to a seven-year-old at Christmas.


    The strength is wide across the retail sector. Apparel stocks like Lululemon Athletica (LULU) and relatively new IPO Rue 21 Inc. (RUE) are only slightly off their all-time highs. Restaurants like growth stocks Chipotle Mexican Grill Inc. (CMG) and luxury Morton’s Restaurant Group Inc. (MRT) have staged impressive investment gains. Retailers from budget conscious Family Dollar Stores (FDO) to high-roller Tiffany & Co. (TIF) are all trading as if the consumer is healthy and spending once again.

    And despite my reservations on this sector, I imagine that retail same-store-sales which will be reported on Thursday will show at least a stable pickup in consumer spending.

    Where is the Money Coming From?

    It’s been quite a mystery to me for some time now. Exactly where is all this pocket change coming from – especially considering the difficulties we are seeing in other areas (savings rates are once again headed lower, consumer credit hasn’t expanded by any material amount, and despite positive payroll headlines, the underlying report is full of holes).

    It wasn’t until this past week when a colleague mentioned the term strategic default did I realize what was likely occurring. Many consumers are spending their mortgage payments! It’s beginning to make sense in the most disturbing way. As homeowners face staggering payments on houses that have negative equity, a large number are simply deciding not to pay their mortgage bill, resigned to the fact that eventually they will lose their house.

    And what happens with the money that would have been sent to the lenders? Well, an increasing mentality of “eat drink and be merry – for tomorrow we’re evicted” has set in.


    It didn’t used to be this way. For decades, the US consumer placed priority on home ownership. We might miss a credit card payment, and we might put off that family vacation, but we were NOT going to default on our mortgage. After all, home ownership was a privilege, and a serious wealth-building opportunity. Heck, even today there are plenty of retired Americans who are living solely on the equity they built in their homes over a number of decades.

    But a sense of hopelessness has emerged when it comes to residential real estate. The principal of home ownership as a tool for wealth building is being sharply disputed. As adjustable mortgages reset to higher rates and payments become more difficult to make, we are likely to see even more homeowners throw up their hands in disgust. If home prices are likely to be low for years (if not decades) then why sacrifice to pay the mortgage on a home where the mortgage is much higher than the value?

    Many consumers are willing to turn in the keys and walk – hoping maybe to get into a better deal once their credit is repaired.

    On top of the negative equity issue, restrictions meant to help consumers are actually reinforcing this idea of strategic default. The past and current administration have both made it a priority to keep homeowners from being foreclosed upon whenever possible. Lenders are required to go through a series of bureaucratic steps before enforcing a foreclosure and many times this process takes several months to over a year to execute.

    The good news is that homeowners who are truly struggling will be allowed to re-negotiate rates, possibly receive a write down on their principal owed, and participate in other federal and state programs aimed at giving them assistance.

    But the dark side of this process is that many homeowners are purposefully not paying the mortgage in a strategic decision to allow the foreclosure process to happen and in the meantime to enjoy having the extra spending money. It is estimated that for every foreclosure on the market right now, there are five or six homes in strategic default."(snip)

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    God/dess Zofia's Avatar
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    Default Re: analyst figures out where the renewed consumer spending is coming from ...

    The banks and their paid apologists would love to have you believe that it's all the fault of the borrowers. The truth is, it's a shared responsibility. Banks, mortgage brokers, realtors and the like all sold home buyers on some pretty wild and crazy mortgage products, no doc loans, interest only loans, balloon payment loans, ARMs and the like. All of which served to help inflate a value bubble that has wrecked the real estate markets. True enough that borrowers should have said no to a lot of these products. But, banks should not have made the offers either.

    Further, there was a lot of valuations that were simply fraudulent. Far too many homes were valued beyond what they were really worth. The banks, knowing this lent the money. Now, they are surprised by declining real estate values. That one does not pass the giggle test.

    There were the bond rating agencies passing out AAA ratings without doing any real inquiry into the underlying asset values or credit worthiness of the borrowers. Of course, since the lenders were using "no doc" loans, how could a legitimate credit rating agency hand out an investment grade rating? They too bear some of the blame.

    And then, there is the Obama administration snuggling up to its financial supporters on Wall Street. Don't think for a moment that the one and his Wall Street cronies are going to come up with any meaningful regulations.

    Z

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    Default Re: analyst figures out where the renewed consumer spending is coming from ...

    ^^^ agreed that there is more than enough blame to go around ... including the fact that the gov't, via fannie / freddie lending policy directives and indirect pressure on private banks ( community service law ), actively encouraged subprime lending.

    However, the larger point of the article I posted is that, at this particular point in time, there is a large ( and growing ) group of American homeowners ( and I use that term loosely ) who are able to spend more money on 'non-essential' items because they have ceased spending money on an 'essential' item i.e. their mortgage payments. This was made possible via various moratoria on foreclosures, by the recently instituted requirement on mortgage lenders that all foreclosures must first be run through a ( months or years long ) HAMP eligibility procedure, by gov't subsidized HAMP re-fi's that 'reset the clock' thus allowing several more months to elapse before the HAMP re-fi'd new mortgage goes into default etc.

    In essence, supposedly well intentioned gov't policy has created a 'moral hazard' situation where people are recognizing that they are now able to continue living in their house for YEARS without foreclosure / eviction, despite non-payment of their mortgage. The 'moral hazard' situation is also exacerbated by the fact that pushing forward eventual foreclosures also pushes forward additional declines in housing prices, giving delinquent homeowners even more reason not to make additional mortgage payments ( i.e. spending more good money after bad in an 'underwater' mortgage scenario).

    The kicker of course is that the 'talking heads' are interpreting the newly increased consumer spending ( i.e. existing income being redirected to the purchase of an IPod rather than making a mortgage payment ) as if the consumer were still making the mortgage payment and ALSO able to afford the purchase of the IPod !

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    God/dess Zofia's Avatar
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    Default Re: analyst figures out where the renewed consumer spending is coming from ...

    Quote Originally Posted by Melonie View Post
    However, the larger point of the article I posted is that, at this particular point in time, there is a large ( and growing ) group of American homeowners ( and I use that term loosely ) who are able to spend more money on 'non-essential' items because they have ceased spending money on an 'essential' item i.e. their mortgage payments. This was made possible via various moratoria on foreclosures, by the recently instituted requirement on mortgage lenders that all foreclosures must first be run through a ( months or years long ) HAMP eligibility procedure, by gov't subsidized HAMP re-fi's that 'reset the clock' thus allowing several more months to elapse before the HAMP re-fi'd new mortgage goes into default etc.
    Since the banks have so far been unwilling or unable to decide what mortgages should be foreclosed and which ones should be modified, why shouldn't the government force them into a process that will do that? We, through our tax dollars are bailing out the failing banks, it looks like we through our regulatory processes should set the rules for when an irresponsible lender should be able to foreclose.

    In essence, supposedly well intentioned gov't policy has created a 'moral hazard' situation where people are recognizing that they are now able to continue living in their house for YEARS without foreclosure / eviction, despite non-payment of their mortgage.
    You apparently do not live in the United States. If you did, you would see that foreclosures are unfortunately too quick rather than too slow. The whole reason for forcing lenders to go through the HAMP process is they were foreclosing too quickly for the few people they had assigned to modifications to work through the backlog of viable loan modification requests.

    The 'moral hazard' situation is also exacerbated by the fact that pushing forward eventual foreclosures also pushes forward additional declines in housing prices...
    The real moral hazard is banks foreclosing without knowing which loans should be modified and which ones should be foreclosed.

    The kicker of course is that the 'talking heads' are interpreting the newly increased consumer spending ( i.e. existing income being redirected to the purchase of an IPod rather than making a mortgage payment ....
    The real problem is the talking head you quote with approval is making erroneous interpretations based on a fantasy view that ignores the reality of the situation. However, your talking head does agree with your world view which is the only one that gets endorsed by the so called moderators. So much for moderation in the Dollar Den of Doom.

    Z

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    Default Re: analyst figures out where the renewed consumer spending is coming from ...

    Quote Originally Posted by Zofia View Post
    Since the banks have so far been unwilling or unable to decide what mortgages should be foreclosed and which ones should be modified, why shouldn't the government force them into a process that will do that? We, through our tax dollars are bailing out the failing banks, it looks like we through our regulatory processes should set the rules for when an irresponsible lender should be able to foreclose.

    You apparently do not live in the United States. If you did, you would see that foreclosures are unfortunately too quick rather than too slow. The whole reason for forcing lenders to go through the HAMP process is they were foreclosing too quickly for the few people they had assigned to modifications to work through the backlog of viable loan modification requests.

    The real moral hazard is banks foreclosing without knowing which loans should be modified and which ones should be foreclosed.

    The real problem is the talking head you quote with approval is making erroneous interpretations based on a fantasy view that ignores the reality of the situation. However, your talking head does agree with your world view which is the only one that gets endorsed by the so called moderators. So much for moderation in the Dollar Den of Doom.

    Z
    Rather than nitpick or otherwise get into a squabble, I am going to try a more positive tack and ask you Zofia : What makes you reject Melonie's gloomy view and causes you to be optimistic ? Do you think increased spending; increased taxes including a VAT; further bailouts of public and private pension funds etc. etc.will all bring us to prosperity ? Exactly HOW do you see that working ?

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    Default Re: analyst figures out where the renewed consumer spending is coming from ...

    ^^^ I appreciate the point you were trying to make, but let's take two steps back and look at the real issues involved.

    When a person applies for a home mortgage they agree to make X monthly payments in Y amount to the lender. If they are unable to make said payments, they agree to return the property to the lender ( while pocketing any equity they may have built up ). When a lender provides a home mortgage they agree to purchase a property for Z thousand dollars ( of the lender's money ), and they agree that after the borrower has made X monthly payments in Y amount that they will transfer ownership of the property to the borrower. Thus, from the onset, both lender and borrower agree that if the borrower cannot make X monthly payments in Y amount that the borrower will vacate the property such that the lender can recover their 'collateral'.

    HAMP is a gov't program which essentially uses US taxpayer money to incentivize lenders to refinance mortgage loans to delinquent borrowers. Legally speaking, under the original mortgage contract the lender has no legal obligation to accept smaller monthly payments nor to accept a lower total dollar amount before transferring ownership to the borrower. Thus the HAMP program 'gives' US taxpayer money to lenders to make up for the difference re smaller borrower monthly payments.

    Statistically speaking, somewhere between 25% and 35% of HAMP modified mortgages wind up with the borrower being delinquent again within 6 months of their HAMP re-fi. The reason for this is arguaby that the 31% of income level maximum mortgage payment under HAMP is STILL beyond the means of a large percentage of HAMP homeowners. Financially speaking, they should never have been approved for a mortgage in the first place, and are no better able to afford living in that home after a HAMP re-fi than they were before the HAMP re-fi. Throwing US taxpayer money at lenders in order to incentivize these HAMP re-fi's thus serves just one purpose ... prolonging the inevitable. Or put another way, for 25% to 35% of present HAMP program 'recipients', US taxpayer money has been used to allow them to continuing to live in a house that they could not and cannot afford.

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    Default Re: analyst figures out where the renewed consumer spending is coming from ...

    ^^^ and from the point of view of the mortgage lender or mortgage bond investor, a distinction needs to be made between voluntarily agreeing to change the terms of an existing mortgage and voluntarily agreeing to waive foreclosure rights to the mortgaged property in exchange for US taxpayer cash, and involuntarily being prevented from exercising foreclosure rights and thus recovering ( some portion of ) their principal when the borrower defaults on mortgage payments. The latest HAMP directive, which forces every lender to fully process every defaulted mortgage borrower's eligibility through the HAMP program ( thus allowing the defaulted 'homeowner' to continue living in the property free of charge for as long as the gov't takes to process HAMP paperwork ) arguably amounts to a government 'taking' since it deprives lenders and mortgage bond holders of the interest earnings due on their 'investment'.

    I would further add that, between the stated eligibility requirements for the HAMP program not covering some 80% of delinquent homeowners ( due to their level of income, their massively 'underwater' mortgage status, etc.), and the other 20% of actually eligible HAMP program homeowners having already demonstrated a 25-33% failure to abide by the terms of a HAMP re-fi'd mortgage despite the lower monthly payments, we're talking about a woefully small percentage of delinquent mortgage borrowers actually benefitting from HAMP. In the case of the huge majority, who either obviously don't qualify, or who do qualify but realistically lack the ability to make lowered monthly payments under HAMP, the gov't directive re full HAMP application processing amounts to nothing more than a 'free ride'.

    The mortgage lenders are not blind to the fact that every month that passes without the delinquent mortgage borrower making a payment cost them lost income. The mortgage lenders are also not blind to the fact that, in the majority of cases, the 'liquidation' value of their property collateral will continue to decline with every passing month that foreclosure and 'liquidation' is delayed. Fearing yet more future policy changes coming from the gov't that would further restrict their rights to recover their collateral, mortgage lenders are now staffing up to process the mandated HAMP applications as quickly as possible, and in turn are rushing to foreclose and 'liquidate' while they are still able to.



    Circling back to the original point ...

    The mortgage lenders are also aware that a new batch of variable rate prime and alt-a mortgages are coming up for interest rate resets in 2011 ... in an environment where mortgage market interest rates are already rising. This will undoubtedly lead to a new batch of mortgage defaults that rival or exceed the magnitude of subprime mortgage defaults which have already occurred. But unlike many of the subprime mortgage borrowers, the variable rate prime and alt-a mortgage borrowers are able to project their future cash flow situations ... are able to deduce that they will be unable to meet their future mortgage obligations ... and are able to conclude that continuing to make mortgage payments for the next few months is simply 'throwing good money after bad' since they will wind up losing their property in any case. This leads to decisions by those prime and alt-a mortgage borrowers to 'strategically default' on their mortgages ... to enjoy living 'rent free' for as many months or years it takes for their lender to actually reach the foreclosure stage ... and to redirect their mortgage payment money toward 'discretionary' spending in the meantime.

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    Default Re: analyst figures out where the renewed consumer spending is coming from ...

    from a professional investors' BBS which humorously summarizes a growing situation that isn't funny at all ...

    (snip)":Saw this ad on late night TV:
    :
    :"Are you one of the 80% of American
    :homeowners still paying that nasty mortgage and
    :all those intrusive and abusive property taxes?
    :Wouldn't you like to join the elite group of
    :Americans who have stopped all unnecessary debt
    :service and are living the good life again?
    :Wouldn't you like to be dining out four nights a
    :week at Olive Garden and getting that new 52"
    :LED HDTV that you deserve? Heck, you can even
    :take the cash and buy the equity of the very bank
    :you and millions of others are stiffing...and
    :you'll make money on it!"
    :
    :"Well, you can do all this and more!
    :Mortgage service is so 2008. The Feds have made
    :living free the New American Dream! You see, the
    :bankers who wrote your note, then sold it to some
    :chump in Asia or to the fools Lloyd Blankfein
    :mockingly calls "sophisticated
    :investors", don't really care if you pay or
    :not. They're either idiots who deserve what hit
    :them, or they're rolling in dough from more types
    :of bailout money than you can imagine. Even the
    :accounting rules got changed so that they can
    :pretend you are paying---and reward themselves
    :with fat bonuses---even if you never pay them
    :another dime. Yes, America is a Great Country,
    :and you can get your piece of the dream."
    :
    :"YOU NEVER HAVE TO MAKE A SINGLE MORTGAGE
    : PAYMENT AGAIN. Nobody cares anymore. Don't be
    :the last fool. Deadbeat is the new way to
    :prosperity"
    :
    :"Call 1-800-STIFFEM for your free kit on how
    :to live free forever." "(snip)

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    Default Re: analyst figures out where the renewed consumer spending is coming from ...

    Quote Originally Posted by Melonie View Post
    HAMP is a gov't program which essentially uses US taxpayer money to incentivize lenders to refinance mortgage loans to delinquent borrowers. Legally speaking, under the original mortgage contract the lender has no legal obligation to accept smaller monthly payments nor to accept a lower total dollar amount before transferring ownership to the borrower. Thus the HAMP program 'gives' US taxpayer money to lenders to make up for the difference re smaller borrower monthly payments.
    A classic example of advancing form over substance. A good way to destroy the banking industry too. The problem is the banks have so far been unwilling to do what is in their best economic interests. That is decide which properties and borrowers they should foreclose and which they should modify. While HAMP is not perfect, it is far far far better than what the banks would do on their own. Let's face it, a mortgage is not a suicide pact for all of us. Even if the banks seem to act like it is.

    Z

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    Default Re: analyst figures out where the renewed consumer spending is coming from ...

    Quote Originally Posted by Zofia View Post
    A classic example of advancing form over substance. A good way to destroy the banking industry too. The problem is the banks have so far been unwilling to do what is in their best economic interests. That is decide which properties and borrowers they should foreclose and which they should modify. While HAMP is not perfect, it is far far far better than what the banks would do on their own. Let's face it, a mortgage is not a suicide pact for all of us. Even if the banks seem to act like it is.

    Z
    Why is the Federal Government involved at all ?

    Maybe the hope of a Federal bail-out is keeping the banks from otherwise acting in their own interest ?

    If there were no HAMP program, the banks would have to do their own "work-outs" and/or short sales, wouldn't they ?

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    Default Re: analyst figures out where the renewed consumer spending is coming from ...

    the 'gold foil hat' crowd would probably tell you that certain banks are grateful for the delay imposed by the HAMP procedure mandate. With that mandate in place, they can avoid having to declare some number of mortgages as delinquent ... thus forcing those banks to increase reserves and take writeoffs. As to which banks this situation would involve ...

    (snip)"The impact of "extend and pretend" is to create a gap between the reported value of assets and the value they would have on the basis of the cash flows that those assets can reasonably be expected to generate over their maturity. In order to avoid having to restate assets, banks have allowed an increasing gap to develop between the volume of delinquent loans and the volume of loans actually in foreclosure, creating a growing "shadow inventory" of impaired but unmodified and unforeclosed loans.

    Moreover, regulatory changes over the past year have affected what actually gets reported as "troubled." As the New York Times recently observed, " A bank owed, say, $4 million on a property now worth $3 million would previously have had to classify the entire loan as troubled. Now it can do that to the $1 million difference only." In effect, even though impaired loans tend to sell at only 30-50 cents on the dollar (reflecting a modest haircut to the amount typically received in foreclosure), banks can choose the amount of assets it reports as troubled simply by choosing what value to assign the property while it holds the bad loan on its books. "(snip)

    (snip)"TransUnion reported that consumers delinquent on their mortgages but current on their credit cards increased by 6.6%. In effect, people have been choosing to pay their credit cards in priority to their mortgages.

    As for policy efforts to reduce delinquencies, I've long argued that it is a bad idea for policy makers to announce delinquency prevention plans that have, as their centerpiece, publicly subsidized reductions in mortgage principal. It's one thing to extend the loan in a way that preserves its present value, by swapping a claim on future appreciation in return for principal reduction, but it's quite another to offer to cut the principal outright. The reason is that instead of confining the assistance to presently troubled borrowers, you create a whole new set of borrowers who then choose to be troubled in order to get the assistance. According to a University of Chicago study, "strategic defaults" - where people choose to default on their mortgages even though they can afford to pay - accounted for 35% of all residential defaults in December 2009, up from 23% in March 2009. Offering public subsidies for this behavior, when too many homeowners are already legitimately struggling, does not smack of a bright idea. "(snip)

    from

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