I've been known to ridicule the Washington political establishment, mostly because that's exactly the sort of attention they richly deserve. But, as I read today about the legislative attempts to "do something" about the housing crisis, I almost (repeat, almost) felt sorry for the politicians who are working on a relief bill. This quote from today's Wall Street Journal explains why:
"But many borrowers are in such bad shape that even a modest write-down of their loan balance isn't likely to help, suggests a recent analysis by Neighborhood Housing Services of Chicago, a nonprofit that counseled more than 1,900 families last year. Just 10% of those homeowners fell behind on their mortgage because of a medical problem, death in the family or other one-time event, a situation that can often be resolved by putting them on a repayment plan.
"Another 37% are in unaffordable loans, but could be put back on track if the mortgage company agreed to freeze the interest rate at 6% and, in some cases, make a small reduction in the loan balance....
"More than half of callers are in far worse shape. Many took out so called stated-income loans that exaggerated their incomes and can't afford their mortgages even at a 0% interest rate. To make payments manageable, the mortgage company would have to cut the outstanding loan balance by an average of $76,000."
Apart from the irreconcilable interests at play (lenders vs. homeowners), it's an election year. Even if the politicians do get something passed, it will soon be all-too clear that they've in effect put a band-aid on an amputated limb. Simple arithmetic shows that since August 2007, the average number of foreclosure filings exceeds 7,000 per day. The Wall Street Journal story I quoted also cited a report estimating that "foreclosures won't peak until the middle of next year."
As is usually the case, one well-done chart is worth more than words, and the chart below is especially worth studying. Apologies for its size (you may want to print a hard copy), but I'm showing it to you exactly as it appears in the April issue of the Elliott Wave Financial Forecast. It shows the major categories of lending activity, plus the trends in lending standards and loan demand -- in other words, what a credit crunch actually looks like.
This chart is part of the Special Section in EWFF, "History Catches Up to the Credit Bubble." It tells you what the headlines would be, if the media and political establishment had a sweet clue.