A few days ago Robert Lenzner of Forbes had a column discussing what he termed "phantom income" created by $1.4 trillion of delinquent mortgages, based on an analysis from TrimTabs' Madeline Schnapp. As usual, we decided to bypass the messenger and go straight to the source. Below is Madeline's clarification on the issue. As we expected, it is not so much an issue of bank mortgage fraud and cash flow deficiency (which by now everyone knows is pervasive, and everyone knows is being backstopped each and every quarter by the GSEs to the tune of tens of billions of dollars every three months like clockwork). Incidentally, a topic we are surprised nobody in the media has picked up on, is that indeed banker bonuses appear to be running well below last year's levels for many institutions. The reason: while accounting gimmickry allows banks to pad their bottom line, it does little to actually stimulate the cash flow statement. And since investment bankers prefer to be paid with cash and not out of accounts payable, the truth is that banks are actually hurting when it comes to actual cash retention: a big red flag to cut through all the FASB accounting fraud. But back to Schnapp's point: a far more important observation, and one which we have been claiming since 2009 is the primary reason for the consumer "renaissance", is that the "phantom stimulus" which allows consumers not to pay their mortgages (with the banks' and the GSEs' blessing) is equivalents to about $84 billion annually, or 0.5% of GDP. Add to that the $120 billion in payroll tax cuts and $60 billion in "Make Work Pay" tax credit, and one can easily see how that government's fiscal largess immediately accounts for more than half of the projected 2011 GDP growth, the other half being more than accounted for through (now years of) inventory restocking.
We asked Madeline to elaborate on her $1.4 trillion number. Here is what she said:
It was a number taken out of context.
Here is the context using back of the envelope calculations.
There are currently about 7 million delinquent mortgages in which homeowners are not making payments.
Average mortgage probably $200,000
That means there is somewhere in the neighborhood of $1.0 to $1.4 trillion in non-performing loans that exist somewhere in the system which need to be wrung out of the system if we are ever to get the housing market back as a healthy sector of the economy.
Phantom Stimulus coming from non-performing loans?
Since the average time to foreclose is 484 days and homeowners aren't making mortgage payments and instead are now pocketing their payments, there is a transfer going on from the mortgage servicers who would ordinarily be the recipients of the payments, to the pockets of consumers.
If we assume a mortgage payment is $1,000 per month or $12,000 per year, then conceivably you could be looking at $84 billion annually in extra income to consumers to spend or save.
To put that amount in context, it is greater than the $60 billion "Make Work Pay" tax credit, and is about 2/3rds of the $120 billion extra money that is supposed to come from the 2% payroll tax cut. Or in GDP terms, its in the neighborhood of 0.5% of GDP which is a lot considering Q3 GDP was only 2.7%.
In our view, that's an interesting way of stimulating an economy.
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