The meltdown in the US subprime real-estate market has led to a global loss of 7.7 trillion dollars in stock-market value since October, a report by Bank of America showed Thursday.

Sixty-one percent of the public believes the economy is now suffering through its first recession since 2001, according to an Associated Press-Ipsos poll.

The fallout from a depressed housing market and a credit crunch nearly caused the economy to stall in the final three months of last year. Some experts, like the majority of people questioned in the poll, say the economy actually may be shrinking now. The worry is that consumers and businesses will hunker down further and pull back spending, sending the economy into a tailspin.

“Absolutely, we’re in a recession,” said Hilda Sanchez, 44, of Waterford, Calif.

Squeezed by high energy and food bills, “we can’t afford the things that we normally buy,” she said. “We are cutting corners in our spending. For our groceries, we are buying a lot of generic and we are eating out less.”

For many, the meltdown in the housing and mortgage markets has proved especially disturbing. Record numbers of people were forced from their homes, unable to afford the monthly loan payments. People watched their single biggest asset fall in value, a reason to tighten the belt.

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Now the bloom is off the residential mortgage-backed securities (RMBS) rose. And some borrowers, even those who can theoretically afford to keep their homes, realize they owe much more than what comparable houses in the neighborhood are selling for — and think that prices won’t rebound anytime soon. So they’re walking away, according to anecdotal reports as well as recent statements by top executives of both Wachovia and Bank of America.

In most cases, once a homebuyer splits, the mortgage-securities investors are stuck with the loss. In some states, including California and Arizona, this provision is the letter of the law. In others, the bank forgives the balance of the loan — a common practice that’s unlikely to change now, given the criminal and civil investigations banks are already sweating through.

Essentially, mortgage-bond investors, seemingly unwittingly, sold homebuyers a put option, without properly pricing it, and now homeowners are exercising that option. Moreover, prime borrowers in many markets face the same incentives.

Yes, this behavior is new — but only when it comes to houses. Americans have long been able to cut their losses from bad investments and start over. It stands to reason that when the market made houses into yet another speculative investment, Americans would do the same.

Borrowers acted rationally in response to market forces and incentives during the bubble: Buy a house because prices always go up; you can’t lose. Many are acting rationally now: Mail the keys back and un-borrow the money, because prices are sinking fast while the debt isn’t. When the house was purchased not as a first home but as a rental investment, the decision is even easier.

Imagine: Politicians keep saying that Americans need protection from their big, bad lenders — but that protection is already there.

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This is the new America, Southern California’s affordable edge city, drowning in a sea of debt. In the Inland Empire, the eastern-most suburbs of Los Angeles, one out of every 43 households is facing foreclosure proceedings.

Peek behind the palm trees and there you see the most shocking sight: abandoned swimming pools, fetid and green, left to the elements and choked with algae. Thousands of people have walked away without even draining the water. Mosquito control agents now patrol these murky pools, treating them with pesticides to keep disease-carrying larvae from forming.

“With the skyrocketing foreclosure rate, the problem is compounding daily,” said Jared Dever, a spokesman for the government district that monitors insect breeding grounds. He said about 2,000 abandoned swimming pools would have to be treated in just one part of Riverside County.

The new year dawned with banks set to repossess more homes than any time since the Great Depression ”“ about 2 million residences, according to various forecasts.

Is this the image of our consumptive age: the empty swimming pools of Riverside County? The epitome of middle-class life as just another cash play? People who took out loans on houses they never could afford, hoping for a quick flip, have left this squalor under the sun to the mosquito-control agents.

—Timothy Egan

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The federal government could make this happen by entering into an arrangement with American banks that hold subprime mortgages, in which homeowners typically pay a low interest rate for two or three years then face much higher payments. Here’s how it would work: The government would guarantee the principal of the mortgages for 15 years. And in exchange the banks would agree to leave their “teaser” interest rates on those loans in effect for the entire 15 years.

This would instantly give the lending banks new capital. As these mortgages would be guaranteed by the Treasury, they would suddenly be assessed, on bank balance sheets, at their original value – and a significant amount of the banks’ lost capital would be restored. Plus, the banks would receive, from most of the homeowners with subprime mortgages, up to 15 years of teaser-rate payments.

By solving the bank capital crisis immediately, this strategy would ensure that fewer families would lose their homes, that fewer neighborhoods would deteriorate because of abandoned housing and that, as a consequence, there would be less downward pressure on local real estate prices and property tax revenues.

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“There has been a failure in some of the key assumptions which supported our analysis and modelling,” Mr [Ray] McDaniel admits. “The information quality deteriorated in a way that was not appreciated by Moody’s or others.” Mortgage borrowers, in other words, did not behave as expected.

The issue at stake revolves around so-called delinquency rates, the proportion of people who fall behind on their debt repayments. When American households have faced hard times in previous decades, they tended to default on unsecured loans such as credit cards and car loans first ”“ and stopped paying their mortgage only as a last resort. However, in the last couple of years households have become delinquent on their mortgages much faster than trends in the wider economy might suggest. That is particularly true of the less creditworthy subprime borrowers. More­over, consumers have stopped paying mortgages before they halt payments on their credit cards or automotive loans ”“ turning the traditional delinquency pattern on its head. As a result, mortgage lenders have started to face losses at a much earlier stage than in the past.

“In the past, if a household in America experienced financial problems it tended to go delinquent on its credit cards, but kept on paying its mortgage,” says Malcolm Knight, head of the Bank for International Settlements, the central banks’ bank. “Now what seems to be happening is that people who have outstanding mortgages that are greater than the value of their home, or have negative amortisation mortgages, keep paying off their credit card balances but hand in the keys to their house”‰.”‰.”‰.”‰these reactions to financial stress are not taken into account in the credit scoring models that are used to value residential mortgage-backed securities.”

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The relatively generous treatment of debtors in the US seems to illustrate, at the national level, a pattern found among US states. Pro-debtor institutions are, in political terms, a substitute for redistributive taxation.

Where credit is easy, and the consequences of non-repayment are not too drastic, households can maintain consumption for long periods even when their income is falling. So, the political resistance to pro-rich policies is much less sharp. The massive increase in income inequality in the US since 1970 has coincided with an equally massive boom in consumer credit.

The obvious question is whether this political equilibrium can survive. We’ve already seen a tightening of bankruptcy laws in the US and a big shift away from fixed-rate loans. Almost certainly, in the wake of the current debacle, lenders will act to protect themselves from jingle mail by lending lower proportions of house value and demanding additional security.

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The federal lawsuit was brought by Mark Zachary, a regional vice president and manager of the Countrywide KB Home Loans division in Houston.

He seeks unspecified compensatory and punitive damages against the joint venture of mortgage lender Countrywide Financial Corp. and builder KB Home.

The lending practices of Countrywide Financial and other mortgage companies have come under scrutiny amid a surge in home loan defaults among borrowers with poor credit histories. On Tuesday, Countrywide reported a fourth-quarter loss of $422 million after losing $1.2 billion in 2007’s third quarter.

In the suit, Zachary contended he was given an excellent performance review last February then fired three months later after he blew the whistle on fellow employees and outlined instances in which appraisers were “being strongly encouraged to inflate homes’ appraised value by as much as 6 percent.”

That resulted in buyers owing more than their home was worth, Zachary claimed in the lawsuit filed Jan. 17 in U.S. District Court in the Southern District of Texas.

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A little over 15 minutes–watch it all.

A homeowner who can’t sell his house tells the L.A.Times, “Foreclose me. … I’ll live in the house for free for 12 months, and I’ll save my money and I’ll move on.”

Banks and lenders fear this kind of thinking — that walking away from a house could be the smart economic move — appears to be on the rise. Wachovia, in a conference call yesterday, warned investors that increasing numbers of homeowners are walking away from their homes by choice: “… people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they’ve lost equity, value in their properties…”

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Foreclosures and default notices skyrocketed to record peaks in California and the Bay Area in the fourth quarter of 2007, according to a report released Tuesday. The information was a fresh reminder that the slumping real estate market is continuing to have a serious impact on homeowners, particularly those with risky subprime mortgages.

Lenders repossessed 31,676 residences in California in the October-November-December period, according to DataQuick Information Systems, a La Jolla research firm. That was a dramatic 421.2 percent increase from 6,078 in the year-ago quarter.

In the Bay Area, foreclosures rose an equally stunning 482.5 percent to 4,573 in the fourth quarter, compared with 785 a year ago. Contra Costa County, with 1,558 foreclosures, up 533.3 percent from a year ago, had the most, followed by Alameda County with 1,026 (a 514.4 percent increase) and Solano County with 704 (up 528.6 percent).

“Foreclosure activity is closely tied to a decline in home values,” DataQuick President Marshall Prentice said in a statement. “With today’s depreciation, an increasing number of homeowners find themselves owing more on a property than its market value, setting the stage for default if there is mortgage payment shock, a job loss or the owner needs to move.”

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Marty Ummel feels she paid too much for her house. So do millions of other people who bought at the peak of the housing boom.

What makes Ms. Ummel different is that she is suing her agent, saying it was all his fault.

Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.

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Home construction plunged last month to its lowest level in 16 years, as builders cut back and their lenders grew wary amid rising delinquent construction loans.

Housing starts plunged 14.2% in December to a seasonally adjusted annual rate of 1.006 million, the slowest pace since 996,000 starts in May 1991. Permits, an indicator of future construction, tumbled 8.1% to a 1.068 million pace, the Commerce Department said.

While builders have been scaling back for many months, some said the end of 2007 was the bleakest period yet in the slump, forcing them to make sharp cutbacks.

“The last quarter was the most challenging environment since the downturn started in July 2005,” said Douglas Smith, president of Miller & Smith, a builder in McClean, Va., which sold 350 homes last year. “All of the ramifications from the mortgage meltdown really took hold.”

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Update: According to CNN, in the Detroit area one out of every 138 homes is in foreclosure at the present time,

The stock market’s already-brutal start to the new year grew even worse today, driving some major indexes into bear-market territory, as fear of a recession triggered another barrage of selling.

The market fell steadily through the day after brokerage giant Merrill Lynch & Co. divulged a nearly $10-billion quarterly loss and a regional manufacturing report pointed to contraction in the sector.

Not even the endorsement of an economic stimulus plan by Federal Reserve chief Ben S. Bernanke could ease investor fears.

The Dow Jones industrial average sank 306.95 points, or 2.5%, to 12,159.21 — its lowest level since March. It is down 8.3% since the start of the year.

The Standard & Poor’s 500 index dived 39.95 points, or 2.9%, to 1,333.25 — its lowest close since October 2006. The index is off 9.2% this month.

The technology-heavy Nasdaq composite index fell a relatively restrained 2%.

Bernanke, testifying on Capitol Hill, again pledged that the Fed would cut short-term interest rates further, and said he supported proposals in Congress to buttress the economy with fiscal-stimulus measures. But his comments were overshadowed by the latest economic data.

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Note that the move in the Value Line Index is by definition now a bear market (a decline of 20%). A few blog readers back in the fall would occasionally email and say–why are you posting about the economy, who cares, etc. etc. Never mind that it fits one of the purposes of the blog as it was originally founded. Now the economy is the number issue on the minds of voters in the current Presidential election. Hmmmm–KSH.

Update: There is more from AP here also.

A headline currently crossing.

The housing bust that has plagued the nation and the S.C. coast for more than a year has made its way to the Midlands.

The Columbia area had its first annual decline in home sales since 2000 with a 2.4 percent dip last year, the S.C. Association of Realtors reported Wednesday.

Homes are staying on the market a week longer than in 2006, an average of 85 days.

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At Vixxen Hair Salon, the main topic of conversation has always been money. But since last August, Anjanette Booker, the owner, has noticed a new focus. “Now it’s money and foreclosures,” Miss Booker said.

The Vixxen salon, along with the nearby salon Hair Vysions, is one of the informal social centers for the Belair-Edison neighborhood, a community of brick row houses that have in recent years been bought largely by single black women with children.

For each of the last four years, more than half of the foreclosures in this neighborhood have been homes owned primarily by women, according to an analysis of public records by the Reinvestment Fund, a nonprofit community development organization.

The foreclosures threaten the neighborhood’s fragile stability. And they highlight a broader dimension of the housing meltdown: subprime mortgages, which are driving the foreclosure rate, have gone disproportionately to women.

Single women have been among the fastest-growing groups of homeowners in recent years, and in Baltimore they accounted for 40 percent of home sales in 2006, twice the national average, according to the National Association of Realtors. Nearly half of these mortgages were subprime, National Community Reinvestment Coalition found.

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As leaders in Washington turn their attention to efforts to avert a looming downturn, many economists suggest that it may already be too late to change the course of the economy over the first half of the year, if not longer.

With a wave of negative signs gathering force, economists, policy makers and investors are debating just how much the economy could be damaged in 2008. Huge and complex, the American economy has in recent years been aided by a global web of finance so elaborate that no one seems capable of fully comprehending it. That makes it all but impossible to predict how much the economy can be expected to fall before it stabilizes.

The answer could be a defining factor in the outcome of the fiercely contested presidential election. Not long ago, the race centered on the war in Iraq.

But now, as candidates fan out across the country, visiting places as varied as the factory towns of Michigan and streets lined with unsold condominiums in Las Vegas, voters are increasingly demanding that they focus on the best way to keep the economy from slipping off the tracks.

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Losses arising from America’s housing recession could triple over the next few years and they represent the greatest threat to growth in the United States, one of the world’s leading economists has told The Times.

Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.

Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: “American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses.”

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The number of mortgage fraud cases has grown so fast that government agencies that investigate and prosecute them cannot keep up, lenders and law enforcement officials have said.

Reports of suspected mortgage fraud have doubled since 2005 and increased eightfold since 2002. Banks filed 47,717 reports this year, up from 21,994 two years ago, according to statistics from the Federal Bureau of Investigation and the Financial Crimes Enforcement Network of the Treasury Department. In 2002, banks filed 5,623 reports.

“I don’t think any law enforcement agency can keep up with mortgage fraud, because it’s such a growth industry,” said Chuck Cross, vice president of mortgage regulatory policy for the conference of state bank supervisors, an organization of regulators and bankers. “There’s too many cases, not enough agents.”

Mortgage fraud covers crimes like false statements on mortgage applications and elaborate “flipping” schemes that involve multiple properties and corrupt appraisers, title companies and straw buyers.

In one common flipping plot, someone buys a house, has it appraised for more than its true value and sells it to a straw buyer for the inflated price, pocketing the difference. The straw buyer lets the house fall into foreclosure, leaving the bank with the loss.

The cases coming into view reflect the recent boom in mortgages with limited borrower documentation and lax scrutiny.

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The decline in home prices accelerated and spread to more regions of the country in October, according to a series of private indexes released Wednesday.

Prices fell 6.1 percent from October 2006 in 20 large metropolitan areas, according to Standard & Poor’s/Case-Shiller indexes, compared with a 4.9 percent decline in September. All but three of the 20 regions saw real estate values fall, and even the three places ”” Seattle, Portland, Ore., and Charlotte, N.C. ”” where prices were up from a year ago saw prices fall from a month earlier.

The quickening decline in home prices could hurt the broader economy by leading to more foreclosures as homeowners have more difficulty refinancing mortgages and by sapping consumer spending as Americans feel less wealthy. But economists also noted that a faster descent from boom-era prices would allow the housing market to right itself sooner by removing vacant homes from the market.

Stocks fell modestly Wednesday in response to the latest home price data and on weaker than expected retail sales. The Standard & Poor’s 500-stock index was down 0.4 percent, or 5.32 points, to 1,491.12; the Dow Jones industrial average was down 36.09 points, or 0.3 percent, to 13,513.24.

“The one disconcerting thing about the number is the rate that prices are falling is accelerating,” said Patrick Newport, an economist at Global Insight, a research firm outside Boston.

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Martin Feldstein says in part:

Because monthly data for December will not be available until next year, we cannot be sure whether the economy has turned down. The measure of personal income for October suggests that the economy may have peaked and begun to decline, but the data for employment and industrial production in November and for sales in October show continued growth.

My judgment is that when we look back at December with the data released in 2008 we will conclude that the economy is not in recession now. There is no doubt, however, that the economy is slowing. There is a substantial risk of a recession in 2008. Whether that occurs will depend on a variety of forces, including monetary policy and a possible fiscal stimulus.

Read it all and the others as well.

“The Fed’s policy makers seem reluctant to say what everyone seems to know: that the risk to economic growth is the predominant concern today,” said Brian Sack, an economist at Macroeconomic Advisers, a St. Louis-based forecasting firm….

“Consumers can get credit, but it is harder now and more costly than it should be,” said Mark Zandi, chief economist at Moody’s Economy.com.

Mr. Zandi and others were particularly critical of the Fed for not cutting the discount rate by at least half a percentage point and extending the loans to 90 days instead of the present 30 days. Banks often fund their operations by borrowing for 90 days at the London interbank rate, which is now just over 5 percent. Allowing banks to borrow at a significantly lower rate from the Fed’s discount window, and for longer terms, economists said, would send a clear signal to financial institutions to encourage more activity.

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Update: Greg Ip in today’s Wall Street Journal has this:

Fed officials, however, continue to consider ways of using various tools — including the discount rate — to combat banks’ unwillingness to lend even to each other, which they view as a threat to economic growth. The central bank could take action within days.

A variety of steps, widely discussed in the markets, are likely to be on the table, including another cut in the discount rate, longer-term loans to money-market dealers, easier collateral rules for loans from the Fed, and other steps last taken in 1999 to alleviate funding pressures ahead of the year 2000, when many feared a “Y2K” computer bug would disrupt markets and create economic havoc.

But if this is the case, why not do that yesterday???

So far… trouble has been avoided. The housing market peaked early in 2006. Since then home-building has plunged, dragging overall growth down slightly. But the economy has remained far from recession. Consumers barely blinked: their spending has risen at an annual rate of 3% in real terms since the beginning of 2006, about the same pace as at the peak of the housing boom in 2004 and 2005.

At the same time, rapid growth in emerging markets coupled with a tumbling dollar has provided the American economy with a new bulwark, one that strengthened even as financial markets seized up over the summer. Exports soared at an annual rate of 16% in the third quarter. Thanks partly to strong export growth, revised GDP figures due on November 29th are likely to show that America’s output grew at an annual rate of around 5% between July and September. Never mind recession: that is well above the economy’s sustainable pace of growth.

But the good news may be about to come to an end. The housing downturn has entered a second, more dangerous, phase: one in which the construction rout deepens, price declines accelerate and the wealth effect of falling prices begins to change consumers’ behaviour. The pain will be intensified by a sharp credit crunch, the scale of which is only just becoming clear. And, in the short term, it will be exacerbated by a spike in oil prices””up by 25% since August””that is extreme, even by the standards of recent years. The result is likely to be America’s first consumer-led downturn in close to two decades.

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In Granada Hills, Calif., Natalie Brandon is fighting to keep the three-bedroom ranch house she bought in 1985 for $105,000. Mrs. Brandon, 51, does medical billing for doctors; her husband is a dispatcher for a local gas utility. Last year, she got a $625,500 mortgage from Argent, now owned by Citigroup. Her 7.99% interest rate isn’t set to rise until next June, but she already is behind on payments.
Over the past five years, she has refinanced her home five times, each time taking out cash and paying prepayment penalties. Last year, all she had to do to refinance was state that she and her husband earned a combined $100,000. She says she used the proceeds to pay off $30,000 owed on her white Lexus.

This year, she says, their income fell after she suffered a short-term disability. Mrs. Brandon figures if she sold her home today, she wouldn’t get more than $450,000 — what a nearby home sold for in foreclosure.

She has tried for months to get her loan modified, and missed her June and September payments. Last month, Damien Gutierrez, a Citi Residential home-retention manager, offered to fix her interest rate at 6% for 40 years, she says. One week later, she says, he said he was authorized only to offer her a five-year fixed rate. Earlier this month, Citigroup offered her a six-month trial at 6%, saying it would extend the modification to three years if she keeps up with her payments, she says. Mr. Gutierrez didn’t return calls seeking comment.

Read the rest here.

This is painful but important to watch.

The national foreclosure rate for the month was one foreclosure filing for every 555 households.

Eric S. Broida wants to trade up. He has been eyeing a multimillion-dollar house near his Pacific Palisades home and thinks it might be a bargain. Eventually, that is.

The 4,600-square-foot house has languished on the market for six months. The sellers have cut the asking price several times, slashing it from $4.6 million to $3.6 million.

When the price falls by an additional $400,000 or so, Broida will be ready to pounce.

“There is nowhere to go but down from here,” said Broida, a leasing broker for office space. “I know it in my gut.”

Few would argue. Southern California home prices have fallen for five straight months, according to data released this month, and are now down 12% from their peak last spring and summer.

For most of this decade, skyrocketing home values were a frequent topic whenever people gathered along soccer sidelines or at backyard barbecues. But the conversation has taken an about-face, noted Jeff Vendley, a Ventura mortgage broker who is trying to sell two Oxnard town houses he bought in 2004 and 2005.

Now, he said, people are wondering, “How low we can go?”

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