The Upcoming Crisis Has Started

I have been seeing a few disturbing trends in the economy in the last six months that lead me to believe that, not only did we not have an actual recovery, but that we are actually heading for a continuation of the downturn that began with the popping of the real estate bubble, only worse.



Since 2008, the number of households living from paycheck to paycheck has increased from 47% to 77%! That’s an increase of 63% in the raw number of families living on the fringe of having to downgrade their standard of living. This trend is one of the most alarming that I have ever seen, and tells me that all the bank bailouts, economic stimulus packages, and various government interventions have been ineffectual against the recession that they've been battling for the last several years.



Housing is in much worse shape than was previously thought. Banks have been sitting on a huge amount of foreclosed property that they haven’t been listing in the marketplace. This represents future competition against homeowners wanting to sell their houses that will take many years to clean up. What’s far worse than that is the new occurrence in which three major home loan companies have recently admitted to falsifying legal, court paperwork in foreclosure cases, and have since stopped their property foreclosure processes. The actual cause of this is due to the fact that many banks choose to bundle up houses into what is called a Mortgage Backed Security, then sold off the income piecemeal to numerous investors. Consequently, the actual titles on the individual houses have become hopelessly clouded, and no one appears to be able to definitively tell just who really is the owner of the house!



This is so bad that some recently purchased home foreclosures have been reversed. (Think about buying a home through a real estate agent, and then getting informed that you need to give it all back again! It's actually happened recently.) Most title insurers are at present refusing to issue insurance for any mortgages on previously foreclosed property, which means that lenders won’t issue financing for the purchase, and that other banks don't have a way to sell their foreclosures.



This is actually much worse than it appears at first glance. The value of the properties having foreclosure filings against them in 2009 was almost $1 Trillion dollars. Plus this isn't even the most severe issue. Once people in general recognize that banks don't have a legitimate method to resell their foreclosed houses, and that there is a possibility that their lender can’t actually show it has the right to foreclose, many of those people will cease paying their mortgages. Trillions of dollars worth of house loan notes could (and most probably will) go sour overnight.



The only thing that might stop a tremendous wave of defaults at this point is that the general public doesn't know which houses have got clouded titles, and which don't. And so I expect that a number of the people playing games with their mortgage loans will be in for a terrible suprise before long. On the other hand, expect both an upturn in services specialized in discovering and pursuing houses where the note holder has a sketchy claim, and actions by congress to provide banks with a way to retrace and re-register legitimate loans in the near future.



This is only a symptom of a considerably deeper issue. One that is certainly not disappearing any time soon, and is shaping up to be the financial storm of the century, that could make the real estate crisis seem like a soft springtime rain. Quite simply, credit in the US has become toxic. All the mortgage loan failures in recent years are resulting from lending practices that have been excellent for getting us homes as well as things to place in them, but were horrendous for our future ability to pay for them. Now that we are having trouble, our government is essentially using the nation's credit to clean up the problem. The only problem is that we (our taxable earnings) form the basis of that credit, and we’re broke.

Published by The Rogue Economist