Statistically it's been a rough couple of weeks. The government reported that the number of people below the poverty line has increased dramatically, that the plague of joblessness continued unabated, that housing prices remained steadfastly weak, and that foreclosures spiked somewhat dramatically in the month of August.
For those looking for a silver lining in the current real estate disaster, there was a smidgeon of good news—or was there? Some attributed the uptick in the number of foreclosures to the fact that many financial institutions which had previously halted them altogether as a result of faulty documentation, robo-signing and similar technical obstacles to a smooth process, had begun to lift that freeze. And, that we might be getting back on the road to a more market-driven environment.
My take is somewhat different: I think the spike tells you that during the "quiet period," nothing happened to prevent or at least slow down the epidemic that is causing so many Americans to lose their homes. For example, if housing prices had improved somewhat during the hiatus and left fewer people drowning in underwater mortgages, perhaps there wouldn't have been so many foreclosures in August. Or, if government or the Fed had come up with a really intelligent and broad-based refinancing plan—one that banks would have been motivated to adopt—maybe some of the defaulting homeowners could have found a way to refinance while the gun was, for a moment at least, not pointed squarely at their temples.
Frankly, I haven't found anything that gives me an indication that things are improving. If there is a recovery going on, it is one that exists only in the most technical sense. The GDP seems to be growing, however anemically, corporate profits are good, the banks are relatively healthy, and no major European country has defaulted on its sovereign debt—yet. But every economic indicia that is important to the average American continues to deteriorate, or at least not to improve.
As we discussed the week that was, a friend pointed out that I had failed to mention one important announcement that happened last week—credit card debt among individuals had risen sharply. "Isn't this a good sign?" he asked. "What could be better for the economy than the consumer starting to spend again?" Unfortunately, he may have misread the tea leaves. I think that the consumer spending on credit cards could be a sign of desperation rather than an omen of good times to come.
Here's what might really be happening. Credit card debt is up because cash-starved unemployed Americans are using what remaining credit they have left on their cards for ordinary household expenses, like utility payments, car payments, or—worst of all—mortgage payments. They just don't have any money, so they're doing whatever they can to avoid apocalypse. And now that foreclosures are speeding up again, the 4 million or so American families that are at risk of losing their homes are getting closer and closer to the edge.
Our options are dwindling and, perhaps the only thing that can help an entire stratum of the American population is action—strong, decisive, intelligent action—to stop the epidemic of foreclosures. The jobless rate is high, but not at unprecedented levels. On the other hand, the foreclosure rate is as high as it has ever been, even during the Great Depression, and threatens a much larger number of people than it did 80 years ago.
Though many proposals are on the table, there is no easy solution. Perhaps understanding the genesis of the disease, however, will help to construct a solution, or at least to appreciate what solutions won't work.
[Article: Medication for Middle-Class Mortgage Mania]
In 2008 and 2009, the United States government engineered a massive bailout of our largest and most important financial institutions. Literally trillions of dollars were expended to preserve the likes of AIG, Bank of America, and many others. The reason that these financial institutions needed help was that they held, or sold, or insured very large pools of securitized mortgages that became worth very little very quickly. But instead of "foreclosing" on those institutions that were "too big to fail," the government did, in my humble opinion, the right thing. They pumped a great deal of money into the beleaguered system and thus prevented what might have actually been a collapse of the entire world financial order.
The trouble is that government largesse to those institutions at the top of the economic food chain didn't solve the underlying problem. In a staggering number of cases real estate was simply not worth the money that had been lent against it. So the financial system survived, but the problem "trickled down" to all those individuals who had, for one reason or another, overpaid for homes or over-financed those purchases. Unfortunately, we are still dealing with the exact same problem, except the "we" isn't the government, it's us.
The HBO film "Too Big to Fail," based upon Andrew Ross Sorkin's runaway best seller, ends with Hank Paulson (William Hurt), then Treasury Secretary, guardedly assuming—but by no means certain—that the billions given by the government to the biggest banks in America would be used by them to make enough loans to solve the underlying problem.
They didn't, and perhaps they can't, because we certainly wouldn't want another wave of lending to individuals who are not creditworthy, or on real estate that is overpriced. That's what caused the problem in the first place. What has to happen now is that someone needs to sponge up all of the misery that has trickled down to millions of consumers who are losing their homes. Whichever side of the political aisle you're on, you need to recognize that only government has a sponge that large. Even given the fact that the U.S. government is having its own fiscal troubles right now, we need both parties to end the politics of "No!" and find a way to rescue millions of American homeowners from foreclosures without breaking the Fed's back.
Adam Levin is Chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.