Peter Pays Paul

Paul Kedrosky has an interesting graph from John Mauldin up in the link below that highlights the difference in the GDP if you were to subtract mortgage equity withdrawals.

Paul Kedrosky: Funny Money: U.S. GDP Growth Net of Mortgage Withdrawals.

What does this mean?

Much of the growth in the US economy from 2001 t0 2006 was fueled by money borrowed from our houses.

Now that home equity has disappeared for many homeowners, discretionary spending will decrease.

Companies that depend discretionary spending (retailers) will feel the pinch by the loss of this discretionary spending money.

(HT:Tom Vanderwell

The Wall Street Journal has another article on an East Bay town this week.

Antioch, California is the focus of an article by the Journal regarding IndyMac Federal Bank’s (formerly IndyMac Bancorp) efforts to stem the tide of foreclosures.

FDIC Plan Tests Limits of Leniency – WSJ.com.

The FDIC is taking steps to modify as many delinquent loans as possible. There are some complications with the process, including loans that IndyMac Federal Bank only provides the servicing for.

IndyMac sold many of the loans it made to various investors. IndyMac still services the loan by collecting payments, keeping track of interest owed, and filing the necessary tax forms. IndyMac is limited in its ability to negotiate with the borrower because it is no longer the lender, the investor that bought the loan is now owed.

I also liked the WSJ’s efforts to give an accurate description of those that had borrowed money from IndyMac. Some used loan proceeds to buy other houses. Others have stopped paying and have “socked away money he saved by not paying IndyMac” and stored it in a safe.

Not all delinquent borrowers are “down on their luck”.