America is back and stronger than ever… Right?
Forget for a moment that unemployment is high, or that wage growth has been just about flat. What matters is that the feel of recovery is in the air and consumer spending — the very lifeblood of our economy — is growing and beating analyst expectations.
Still, it doesn’t really make sense… There’s no growth in income; it’s not as if we can use our homes as personal money machines anymore.
How, then, is this sustainable?
Two Words: Strategic Defaults
These very powerful two words have allowed millions to put money in their pockets that would’ve gone to mortgage.
We’re talking about $8 billion in "saved" cash that’s burning a hole in the pockets of more than six million people, according to Moody’s reports.
And this would explain why consumer spending continues to spike despite rising unemployment, falling incomes, and rising foreclosure rates.
Even Bloomberg News’ Caroline Baum sees this: "Those deadbeat homeowners, facing possible eviction and in some cases unemployed, are throwing caution to the wind — and money at retailers."
We wouldn’t call all of these people "deadbeats," though. For some of these people, finding a new home and having money to raise their families — rather than watching a mortgage eat away at life savings — is better.
Let’s be clear that they’re not all rushing out to buy a new Mercedes.
And, no, it’s not sustainable. We don’t expect the spending spree to continue much longer.
What we’re seeing is that some of these "defaulters" are still living in the homes they no longer pay for — until the banks’ foreclosure. We’re talking about close to 10 million people.
But despite the reason for walking, they have this "saved" cash to spend on retail, boosting spending numbers.
We believe their newfound riches will soon run out; the extra cash for retail will dry up. And that’s because banks are foreclosing faster than ever, forcing defaulters out of the homes they no longer pay for.
In fact, foreclosure filings on more than 367,000 happened in March 2010 — an increase of about 20% from the previous month.
And Bank of America, for one, is rumored to be increasing its foreclosure rate by 600% in 2010.
A long time ago in a faraway land, we would all do anything to pay our mortgages…
People would put off that new car or the vacation to Maui, even take a second job to pay a mortgage.
But times are different.
Unemployment is still high. Some are deciding to walk from homes that will foreclose anyway. And others are walking from underwater mortgages, as negative equity does nothing for them; it’s not as if they can refinance or sell the home with an underwater mortgage.
Others are walking because they lost their job… or just can’t come up with the money.
And this "mess" is far from over.
That Obama plan to keep the unemployed in their homes… It may not help much, if at all.
Turns out when new rules go into effect, unemployment benefits will not count as income for determining whether or not someone qualifies for a reduction in mortgage payment. That means that if you’re unemployed and receive benefits, you’re out of luck with mortgage modifications.
And it’ll result in more strategic defaults and foreclosures.
But the most devastating of all could be the coming Option ARM resets.
When the resets hit, payments on a $400,000 mortgage could easily jump from $1,287 a month to more than $2,593 a month. These people will likely default and walk away.
And many will use that "saved" money for something else, driving consumer spending through the roof and padding GDP numbers with favorable spending numbers (as we’re already seeing).
So, how do you profit from this?
You simply buy the very companies that process foreclosures after these people walk away… and you make a killing from it.
Options Trading Pit readers are doing exactly that. And if this interests you, I suggest you read on for more information on these companies.
Staying Ahead of the Curve,
Ian L. Cooper
Wealth Daily
