More Color On The HAMP Ticker - Macro Level

Let's put a bit more color on my morning HAMP Ticker - this time at a more-macro level of the economy.

To recap, here's the table in question:

From this we can "back in" to the median annual income of these completed mods.  If $837.86 is the median home payment and post-modification it is 31% of gross income (Front end ratio) then we get $2,703 a month in median income, or $32,433 a year.

This is gross income - that is, before taxes.

As I pointed out such a person will pay (monthly) $206.70 in FICA and Medicare tax (the half they "see" in their check) and will have another $300 or so a month withheld in federal income tax.

So we start with a "baseline" of $2,196 monthly that comes in the door (ex payroll and federal withholding taxes, but not accounting for state income tax.)

We know, however, that these people have 59.8% of their gross income that goes to all debt service (house and all other mandatory debts), which means that they have $579.30 to spend on everything other than that mandatory debt service a month.

Now realize this: "Mandatory" debt service only includes minimum payments on revolving accounts such as credit cards!  Making a minimum payment on a credit card, while charging nothing new, results in a pay-down period of many years.  But most people will charge back up at least the principal paid down (which isn't much when paying the minimum especially if you have a 29% interest rate!)

Diane Olick and other analysts say that 2 million homes have "started" HAMP.  Of those only something like 16% have wound up in permanent modifications - under 200,000 - which is what the above represents.  In addition, another 2 million+ people have gone delinquent since the HAMP program began.

The remainder of the HAMP "starts" either have not or will not lead to permanent modifications.  That is, their internals are either worse than or equal to the above - it is almost impossible they are better, or they'd be permanent modifications.

Let's put color on this.  According to Diane Olick 7.5 million homes are either delinquent or in foreclosure.  23% of those delinquent properties have been so for more than a year yet have not foreclosed. 

These are people who are spending in the economy, propping up GDP and economic numbers, because they are making no payment on their house at all.

Let's remember that when these loans "resolve", no matter how they do, that spending power will instantly evaporate in the economy.  Whether their loan is modified into a "sustainable" one (ha!) or whether they are ejected from their house and become renters either way the more than $1,000 a month they are not paying for their mortgage, but are instead dumping into consumer spending will evaporate as they will be forced to spend that money on housing once again.

This is not an inconsequential amount of money.  If we assume the "average" amount not tendered in mortgage (and spent into the economy) is $1,000 per month per home, this is $7,500,000,000 - or $7.5 billion a month (that is, $90 billion a year) that is being "contributed" to the economy falsely and will come back out - one way or another.  It simply must.  This is a bit more than 1/2% of GDP - hardly insignificant - and that consumer spending fuels economic activity with a multiplier effect (the money these people spend at Starbucks pays the employees of Starbucks, who then spend THAT money into the economy.)  There is much argument about the multiplier effect of various government spending programs, but there is less dispute that private spending always has some multiplication factor associated with it.  Therefore, the $90 billion number is understated - the gross GDP "goose" from these defaults may be as high as double that $90 billion, or 1% of GDP!

To this we must add the positive impact of credit-card and other defaults.  The paradox is that failing to pay down debt - that is, defaulting instead of paying as agreed, actually increases GDP, because such a refusal to pay down debt while the money is spent elsewhere causes consumption to be supported.

This, along with the "fiscal juice" from running $1.5 trillion in deficits, are two of the biggest issues facing a "sustainable" economic recovery.  The refusal to understand this dynamic is responsible, in large part, for the (false) belief that our economy is in fact recovering.

You can't really blame most of the ToutTV and media idiots for their lack of thinking in this regard.  It requires analysis, which none of these folks actually do, in order to suss out what's going on.  We haven't had a debt-overhang-fueled recession for 70 years - the last one was The Depression in the 1930s.  Literally none of the current reporters and pundits was alive and trading in the markets or anywhere else the last time it happened, and all we have is a (biased) historical record - an incomplete recollection.

How many people think that the 1920s - the "Roaring 20s" - were a time of fiscal reason and a booming economy?  Nonsense.  The "Roaring 20s" were a time of rampant speculation and debt-binging.  The illusion of prosperity was bought, paid for and maintained the same way it was this time in the 2000s - with debt.  Yet if you read "history" you will find scant if any mention of this fact.

We're not out of this one folks, and we're not going to get out of it either, so long as we keep pretending that loans that aren't performing - and can't - are "money good."  Further, the temporary and ethereal "boost" to consumption and thus GDP that comes from debt defaults will dissipate.  It mathematically must, as eventually creditors run out of cash flow to maintain the illusion that they have "performing" assets when payments are in fact not being made.