Archive for September, 2011
The International Monetary Fund thinks the United States economy is currently not strong enough to fully recover without support from the Federal Reserve.
In the recently released "World Economic Outlook" report for September, the IMF said that fiscal policy will tighten further in 2012, as the Federal Reserve remains on the sidelines. IMF staff analysis suggests that this switch from fiscal stimulus to consolidation will dampen short-term activity.
However, the Federal Open Market Committee is meeting this week and will determine if further stimulus is necessary from the Fed.
Among the advanced economies, real GDP growth in the United States is projected to pick up very gradually from about 1% in the second quarter of 2011 to about 2% later in 2012.
However, this fragility faces the risk of being shattered.
"A strong increase in credit risk could quickly morph into a liquidity shock, as global investors take flight into precious metals and cash: This could occur if there were major political deadlock on how to move forward with consolidation in the United States or if the euro area crisis were to take a dramatic turn for the worse," the report states. "The global repercussions of such shocks would likely be very severe."
The IMF report adds that house prices show no signs of stabilizing in key crisis-hit economies such as the United States and Spain.
"A large overhang of unsold properties with underwater mortgages continues to present a major downside risk to consumption in the United States," the report states, noting that not all property markets are doing so poorly.
"House prices are rising again in other advanced economies, such as France and Germany, and remain high in Canada," it adds. "However, households everywhere have recently suffered significant losses in stock market wealth."
Write to Jacob Gaffney.
Follow him on Twitter: @JacobGaffney
With the FOMC announcement just one day away, the market consensus is that we’re getting Operation Twist. The key question remaining is the size and composition of the twist.
Economists at Goldman Sachs said in a note late Monday that they expect the Fed, in increasing the average maturity of its bond holdings to stimulate the economy, to purchase a net $300-$400 billion in 10-year equivalent debt — i.e., taking on the same amount of duration risk as $300-$400 billion of the current 10-year Treasury note.
Every American upset with the state of mortgage lending should read the Fox Business News article on strategic default in order to meet the "New Face of Foreclosure."
Strategic defaulters are underwater borrowers who intend to remedy their "upside-down situation" by simply walking away from their mortgages.
The Fox Business article paints a clear picture of a 67-year-old strategic defaulter who is walking away from a $166,000 loan.
So is this man a distressed borrower who lost his job, fell ill or landed on unexpected hard times? No, not really. Those situations tend to garner sympathy, and rightfully so.
Instead, this man admits he collects two pensions, Social Security and generates additional income through a small business.
The defaulter also has the ability to make his payments, but lost his drive to do so when home values dropped, leaving him $45,000 underwater.
The borrower's attitude recently changed in other ways. He now wants to live in the city, but he can't sell his home in this economy. Even if he could, it's impossible to get back what he paid. It's a type of new-car syndrome, but on a large scale.
Yet rather than sticking it out, the homeowner called a firm that readily advises homeowners on how to strategically default on their mortgages. If the borrower gets his heart's desire, he will simply walk away from the mortgage, sending the home into foreclosure while remaining cash-rich and free to move on.
Good move, right?
Of course, his neighbors won't be so lucky. They will now be living next to an REO.
Call it the strategic default phenomenon, if you will, but it's more than a trend. It's a threat to the power of contracts and an attack against all Americans who are paying for the mortgage crisis in the form of tax dollars that supplement housing initiatives and maintenance on foreclosures. Not to mention that declining home values and tighter lending standards that are keeping new homeowners on the sidelines.
Mind you, we are not talking about those who are truly in distress. Foreclosures from unexpected life changes are a different beast altogether.
While businesses should not be excused for unethical practices, the idea that homeowners are committing a permissible sin by not paying affordable debt is not admirable. In fact, it's an insult to borrowers who never bought in the bubble and to other homeowners who keep paying on underwater mortgages despite their frustrations.
A few months ago, an attorney working in default raised the following question: What if the strategic defaulter had made money on the same house? If he bought the home for $144,000 and gained a $20,000 profit, could the originator then call the borrower and ask him to split the earnings?
F. Scott Fitzgerald's famous American novel, "The Great Gatsby," dealt with a similar phenomenon in his time. While Fitzgerald's rant against the "careless people" of society in Gatsby was interpreted as an assault against rich aristocrats, his rant was more about carelessness in general. And the principle goes across class boundaries. In his worldview, those who are careless make decisions without consequences. They enjoy the fruits of the high-rolling times and let others pick up the tab when things go bad.
Certainly in the mortgage crisis there were many people and companies who were careless. But the idea that strategic defaulters are common heroes pushing back against a rigged system is the biggest slap in the face to all homeowners who bought into the American Dream only to be stung by the mortgage crisis.
Write to Kerri Panchuk.
Tags: foreclosure, mortgage lending, Strategic defaulters, underwater borrowers
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