EDMOND — Do you ever get the feeling that you’ve passed through the looking glass and are living in Wonderland with Alice? I’m having a little trouble believing so many impossible things lately and I’ll bet you are too. Here are a few more impossible things for you to ponder.

The Senate recently voted down the 5 percent rule. In an effort to stop taxpayer losses for bad loans guaranteed by federal housing agencies Fannie Mae and Freddie Mac, Sen. Bob Corker, R-Tenn., proposed that borrowers be required to make a 5 percent down payment in order to qualify. His proposal was rejected 57-42 on a party-line vote because, as Sen. Chris Dodd, D-Conn, explained, “… passage of such a requirement would restrict home ownership to only those who can afford it.”

Uh, you’re kidding, right? I thought this was the type of thing that got the housing market in trouble in the first place. I know this is probably a quaint, old-fashioned notion, but shouldn’t people who buy houses actually be able to afford them? Did we not learn anything from all this mess?

Fed Chairman Ben Bernanke made a statement recently that I can’t let go by. “It appears to us that the recovery has made an important transition from being supported primarily by inventory dynamics and by fiscal policy towards a recovery being led more by private final demand.”  

Huh? With all due respect to Chairman Bernanke, who I’m sure is far smarter than I am, I’d like to know what is he looking at? This so-called recovery goes down as just about the weakest recovery ever in terms of real final sales growth, which essentially has been non-existent in per capita terms. Private payrolls grew in May at one-fifth the pace posted in April, it looks as if consumer spending stalled for the second month in a row in May, and mortgage applications for new home purchases have sunk to a 13-year low.

Perhaps Bernanke should climb down from his ivory tower and look at real people in real life. Food stamp usage just soared to a new record high with 40.2 million persons, or 18.5 million households, receiving benefits. How is it possible that spending is going to drive the economy by any meaningful pace with so many people clearly struggling?

Here’s another one of those impossible things to believe — the housing recovery. Actually, we should call it the housing non-recovery. Two-thirds of American homes have mortgages — 56 million mortgages outstanding. A little more than half of those mortgages are guaranteed by government entities. Thirty-five percent are held on the balance sheets of banks and thrifts, and 15 percent are so-called private label securities that went to Wall Street. This last piece was the subprime stuff that was some of the worst mortgage debt ever written.

It’s easy to get complacent about the mortgage market now because everyone thinks housing prices and foreclosures have stabilized. So we don’t have to worry about that anymore — or so some people think. But I would argue to the contrary.

Fourteen percent of America’s 56 million mortgages already are delinquent or in foreclosure. So if you multiply 56 million by 14 percent, that means that 7.8 million people right now are not paying their mortgages. That is 7.8 million homeowners who have been delinquent for 30, 60 or 90 days or are in foreclosure already. Ninety-one percent of those people who are not paying are never going to get back to current, according to recent statistics. So that means that of the 7.8 million people not paying their mortgage, 7.2 million are never going to get back to current. That’s a problem as 7.2 million mortgages will go into foreclosure eventually. You can count on it and so can the banks.

Today about 17.2 percent of homeowners are underwater, i.e. they owe more than the home is worth. But if home prices drop 10 percent from here, which I think is quite likely, 27 percent of homeowners would go underwater. In other words, a 10 percent drop in home prices would cause a 56 percent increase in the number of people underwater. This will, with absolute certainly, lead to another surge in defaults.

Then there’s commercial real estate. For the majority of commercial real estate loans that are coming due, nothing is happening on them. They don’t get refinanced, but they don’t get foreclosed on either. If the real estate has lost value, the bank would want to refinance the loan with the borrower bringing more money to the table. But what if the business can’t do that?  They can’t sell and they can’t refinance. If the bank forecloses, they would have to take the real estate off the books at the reduced value and erode their capital position. If they have too many of those, they suddenly have the FDIC on their doorstep. So it’s “extend and pretend” or “delay and pray.”

The bottom line, as much as we’d like to believe otherwise, there’s plenty of pain still to come. That’s something that is possible to believe. Now go and believe something possible, like how to save yourself from the mess that is coming. Thanks for reading.



NICK MASSEY is a financial adviser and owner of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through Securities Service Network Inc., member FINRA/SIPC.