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Sense on Cents Repeats, ‘The Most Critical Economic Statistic’

Posted by Larry Doyle on May 19, 2010 2:49 PM |

Economic progress? Green shoots (remember those)? Improving fundamentals? Stop it.

I remain an eternal and enthusiastic optimist, but I hold particular contempt for those in our media and our markets who will neither look for nor embrace the truth.

In my opinion, America has allowed itself to be numbed by those in Washington who put forth snapshots of economic data with little regard for the big picture. The financial media enables the Washington ‘facade’ under the guise ‘if we don’t highlight the truth, perhaps we can avoid it.’

Life does not work that way.

Why do I raise this topic? Is it mere coincidence, or not, that a year ago today I wrote, “The Most Critical Economic Statistic”:

Which economic statistic is the most important? Unemployment? Housing starts? Trade deficit? Inflation? Retail sales?

Well, they are all important . . . but as I review the many statistics, the economic data that I believe most significant are loan delinquencies. Now, mind you a delinquency does not mean that the loan has defaulted and been foreclosed upon. A delinquency is merely a late payment. Typically loans are classified as 30 day, 60 day, or 90 day delinquent. There is a very high correlation between delinquent loans and those that default.

Loans become delinquent for a whole host of fairly typical reasons. That said, in this economy the nature and array of reasons are growing. As a result, the ability of lenders to forecast and manage delinquencies is increasingly more challenging. Lenders will typically increase reserves as loans become more delinquent in anticipation of a natural rate of default.

Loan delinquencies will often occur even before unemployment hits or sales falter. As individuals or companies feel increasingly squeezed, the monthly loan payment becomes more difficult to make and delinquency results.

While green shoots may appear across our economic landscape, the pace of delinquencies is surging. Some economists will assert that they have forecasted it; however, the government in the Bank Stress tests were clearly too conservative in their default assumptions. Over and above that, any self-respecting analyst will tell you that banks and other lenders (insurance, smaller thrifts) have significantly under reserved against future losses.

Having highlighted delinquencies, exactly one year ago, as the most critically important statistic, and listened to ten out of every nine Wall Street economists call for a turn in the housing market, what news do we receive today? Mortgage Delinquencies, Foreclosures Break Records:

(AP) — The number of homeowners who missed at least one mortgage payment surged to a record in the first quarter of the year, a sign that the foreclosure crisis is far from over.

More than 10 percent of homeowners had missed at least one mortgage payment in the January-March period, the Mortgage Bankers Association said Wednesday. That number was up from 9.5 percent in the fourth quarter of last year and 9.1 percent a year earlier.

Economic woes, such as unemployment or reduced income, are the main catalysts for foreclosures this year. Initially, lax lending standards were the culprit. But homeowners with good credit who took out conventional, fixed-rate loans are now the fastest growing group of foreclosures.

Those borrowers made up nearly 37 percent of new foreclosures in the first quarter of the year, up from 29 percent a year earlier.

The final statistic is actually the most troubling. The fact that homeowners who had been previously deemed to be of good credit are increasingly delinquent and foreclosing does not indicate any kind of true bottom in the housing market, or in the economy as a whole.

The losses embedded in these increased delinquencies and foreclosures are increasingly buried ‘off the books’ at Freddie and Fannie. Just because the losses are buried does not mean they are not very real.

I repeat that unless and until we see consistent progress in terms of improved rates of delinquencies and foreclosures, we should dismiss talk of real economic progress.


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  • Jack Nealon

    Amen brother! When will these knuckle heads in Washington wake up and realize their house ( our Country ) is on fire and finally start to address some of these long festering problems! I hope you and your family are well Larry.

  • LD


    Not so sure the crowd in Washington fully appreciates the depth of the issues….and if they did, the campaign dough might stop rolling in and then what will they do? God forbid they actually look for real work.

    All good here and hopefully there as well.

  • Mike

    Oh boy here we go…

    Just wait til you see these kinds of numbers for credit cards and STUDENT LOANS!!! In today’s environment, millions of graduates will find themselves “underwater” as they realize the value of their degree is significantly less than what they borrowed to attain it.

  • LD


    We have actually seen a little improvement, perhaps I should say leveling, in the delinquencies in credit cards. Why?

    People realize the banks are getting a break from the Feds in terms of delinquent mortgages so they are choosing to forestall paying their mortgage instead of their credit cards. That fact is the reverse of what people used to do.

  • Mike

    I think any boost in retail spending (iPads and what not) also is directly linked to consumers having extra money from not paying their mortgage.

  • coe

    When the Administration sponsors what in essence is a “free pass” on the delinquency front, where is the moral hazard in accepting that subsidy? I’m not smart enough to pretend to have cracked the code of the consumer psyche, but it’s almost as though the whole country is operating on a “good bank, bad bank” principle. Ring fence the legacy credit exposures and pray for and benefit from government intervention there…meanwhile go out and buy the new car or iPad…by the way, speaking of Freddie, Fannie and the Fed and FDIC, aren’t they actually living the dream by running with a huge carry trade – the very same interest rate risk that the regulators are jawboning the subsidized banks to be wary of…as we all know, somewhere down the food chain, somebody is bearing the brunt – that of course would be us, the taxpayers…just wait until the Feds exit the mortgage trade, or better yet, when the adjustable rate mortgages reset into the teeth of an inevitably rising rate environment…I’m afraid this burden will be around a lot longer as a drag on the economy than the false soundings of recovery might indicate…just one man’s opinion

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