Jun182018

Enormous write downs on bad loans fueled the housing recovery

The economy pulled out of the Great Recession because lenders wrote down billions in bad loans, not because borrowers paid these debts off.

Repost from OC Housing News 2011-2016

The financial mainstream media often tells people what they want to hear. They’ve learned they make more money by providing emotional support to people seeking reassurance rather than providing facts and accurate analysis. This is a shame because people often make important and complex financial decisions based on erroneous or biased information they obtain from the financial press. When these investment decisions go bad, people are often wondering what went wrong. The problem is that they trusted the veracity of what they read in the mainstream media.

We’ve seen a great deal of spin and nonsense over the last few years. Barry Ritholtz wrote a post on How to Read National Association of Realtors News Release. I wrote a series of posts on self-serving bullshit from the National Association of realtors. But this goes beyond the NAr. It’s a significant portion of the financial press. For example, watch over the fall as home prices pull back. Each month, we will read about a month-over-month decline, but the reporter will reassure everyone the market rally is intact by pointing out the year-over-year numbers are still good. Are people so insecure that they need this constant reassurance? And when the assurance causes them to make bad decisions, who is responsible for that?

Several years ago, I was outraged by an article that claimed that the Drop in foreclosure rate “heroic” on part of Americans. The author stated, “Americans have done something heroic, really, in the last five years. Faced with all of this debt after the housing boom, they’ve made a lot of progress on paying it down.”

Complete and utter bullshit. The article was written to make people feel good about something they did not do, a collective Kumbaya and fake praise based on a lie people wanted to believe.

First, I would like to point out that one of our readers is a hero. Perspective really did pay down his mortgage debt by taking money out of savings. It was a difficult decision that required sacrifice, but he managed to refinance into a 15-year mortgage at a very low rate, and he is quickly retiring his mortgage debt.

That is heroic. That requires sacrifice. That isn’t what most Americans did.

Let’s take a look at the deleveraging from 2008 through 2013.

However, how do you think this really happened?

Did Ponzis suddenly start making more money during the recession and pay it down with wage income?

No.

Did anyone liquidate their assets to pay off debt? Not very many. So what is the real source of deleveraging?

Bank write offs.

Nearly all the mortgage debt retired during that timeframe was written off by banks.

Look at the astronomical charge-off rates on credit cards. That’s what happens when millions of Ponzis all implode at once.

The same pattern is evident on all consumer loans (this includes car loans). The charge-off rates were more than double the highest previous rate seen at the end of the last recession.

All loans at all commercial banks. Just as bad.

Americans are some kind of heroes, right?

The foreclosure rate came down because banks stopped foreclosing on delinquent borrowers. They went all in on can-kicking loan modifications, and they allowed those who wouldn’t agree to a modification to squat. The illusion perpetuated by the mainstream media is that “struggling borrowers” can’t make their payments due to job loss. There are a few of those people, but many are Ponzis who overborrowed and became accustomed to fresh infusions of debt to sustain their profligate spending.

The economy improved due to lower debt service levels — not because people become less thrifty, but because once they paid off their debts, they had more disposable income. An economy doesn’t require consumer debt or other artificial increases in spending to be prosperous. In fact, any expansion of consumer debt ultimately makes everyone poorer. An economy without consumer debt loses nothing to debt service. The money spent on interest and principal repayment on consumer debt is money not spent in the rest of the economy. That’s the dirty little secret bankers don’t want you to know.

In fact, any expansion of consumer debt ultimately makes everyone poorer. An economy without consumer debt loses nothing to debt service. The money spent on interest and principal repayment on consumer debt is money not spent in the rest of the economy. That’s the dirty little secret bankers don’t want you to know.

That’s the dirty little secret bankers don’t want you to know.