Not So Green Shoots

I acknowledge that there are signs that the economy is on an upswing. But the optimistic scenarios don't jibe with all the data. First of all, the deficit keeps rising due to continued unemployment. That's to be expected, but it will still make it harder for any second stimulus to occur, meaning that we're pretty much stuck with the policies currently in place. The lower tax revenues has led to the first April deficit in 26 years, as typically April is a big enough revenue month that money coming in outweighs money going out. And the deficits are affecting the US credit rating, the ability to obtain cheap money.

Now, I don't want to dwell on the budget deficit, especially because in the near term it can't matter as much as getting people back to work. But it constrains the politically possible in Washington, and it will prevent the Administration from delivering additional help to the economy, which clearly it desperately needs:

Foreclosures in April exceeded even March's blistering pace with a record 342,000 homes receiving notices of default, auction notices or undergoing bank repossessions, according to a regular industry report.

One of every 374 U.S. homes received a filing during the month, the highest monthly rate that RealtyTrac, an online marketer of foreclosed properties, has recorded in four-plus years of record keeping.

"April was a shocker," said Rick Sharga, a spokesman for RealtyTrac. "I would have bet on a dip because March foreclosures were so high.

Instead, filings inched up 1% from March and rose 32% compared with April 2008.

Thanks, opponents to cramdown!

Now, interestingly enough some banks have been so chilled by threats of prosecution in the states that they have started to settle out of court in predatory lending cases, with much of that money going toward reducing principal for homeowners. If that practice becomes more widespread, perhaps we can stop this second wave of foreclosures.

One hears a lot about loan modifications these days. So far there are two basic approaches.

I) The borrower is given relief in the form of a lower interest rates and stretched-out maturities. The homeowner stays in the home.

II) The bank will accept a deed in lieu of the mortgage. The homeowner is out of the home.

There have been very few cases where a homeowner is allowed to stay in the home and achieve a principal reduction. The Boston settlement opens the floodgate for principal reduction. It is the essence of the agreement. All 714 borrowers are now eligible for principal reduction and the money is just sitting there waiting to be collected.

One can imagine the conversations between neighbors in Boston:

A: “Good news finally! I just got 35% net off my first and second mortgage.”

B: “Wow! How did you manage that?”

A: “I was lucky enough to get my mortgages through Goldman Sachs. They did a deal with the Mass AG and I win the lotto!

B: “I have my mortgages with Indy Mac Bank can I get reduction too?

A: Sure. Here is the number to call. Now lets party!

I really want the Administration to succeed, but I hope they aren't being swayed by all this happy talk. We're still in a dangerous place.