Lately there has been an amusing and very spurious, not to mention wrong,
argument among both the "serious media" and the various tabloids, that US
households have delevered to the tune of $1 trillion,
primarily as a result of mortgage debt reductions (not to be confused with total
consumer debt which month after month hits new record
highs, primarily due to soaring student and GM auto loans). The implication
here is that unlike in year past, US households are finally doing the
responsible thing and are actively deleveraging of their own free will.
This couldn't be further from the truth, and to put baseless
rumors of this nature to rest once and for all, below we have compiled a simple
chart using the NY Fed's own data, showing the total change in mortgage debt,
and what portion of it is due to discharges (aka defaults) of 1st and 2nd lien
debt. In a nutshell: based on NYFed calculations, there has been $800 billion in
mortgage debt deleveraging since the end of 2007. This has been due to $1.2
trillion in discharges (the amount is greater than the total first lien
mortgages, due to the increasing use of HELOCs and 2nd lien mortgages before the
housing bubble popped).
In other words, instead of actual responsible behavior of paying down
debt, the primary if not only reason there has been any "deleveraging" at all at
the US household level, is because of excess debt which became
insurmountable, not because it was being paid down,
the result of which is that more and more Americans are simply
handing their keys in to the bank and walking away, and also explains why the US
banking system is now practicing Foreclosure Stuffing, as defined first
here, as the banks know too well, if all the housing inventory which is
currently in the default pipeline were unleashed, it would rip off any floor
below the US housing "recovery" which is not a recovery at all, but merely a
subsidized bounce, as millions of units are held on the banks' books in hopes
that what limited inventory there is gets bid up so high the second housing
bubble can be inflated before the first one has even fully burst.
Naturally, two concurrent housing bubbles can not happen, Bernanke's fondest
wishes to the contrary notwithstanding, especially since as shown above, US
households do not delever unless they actually file for bankruptcy,
and in the process destroy their credit rating for years, making them
ineligible for future debt for at least five years. It is thus safe to say that
all the other increasingly poorer US households (who are not
getting paid more as we showed this
morning with the chart showing Y/Y change in US household earnings) are
merely adding on more and more debt in hopes of going out in a bankrupt blaze of
glory just like everyone else: from their neighbors, to all "developed world"
governments.
And why not: after all this behavior is being endorsed by the Fed with both
hands and feet.
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