The Second Iteration

More on those very worrisome foreclosure numbers today. If you've been an avid reader, you wouldn't be surprised at all to learn that despite big bank moratoriums on foreclosures in February, the number of foreclosures continues to rise across the country.

More than 74,000 homes were lost to bank repossessions during the month, up from 67,000 in January, according to a regular monthly report from RealtyTrac, the online marketer of foreclosed properties. Nearly 1.2 million have been lost since the foreclosure crisis hit in August 2007.

The number of foreclosure filings rose 6% during the month after falling 10% in January. Worse, filings leaped nearly 30% compared with February 2008. And the results confounded expectations: A downtrend had been expected due to the numerous foreclosure moratoriums in effect during the month.

Why expect a downtrend at all? Home prices are still falling. Unemployment rose sharply in January and February. ARM loans are resetting to higher rates across the country.

Many states that had previously escaped the worst ravages of the foreclosure plague have started to feel the effects. In South Carolina, foreclosure filings, which include notices of default, notices of foreclosure sale and bank repossessions, skyrocketed 254% compared with last February. The state recorded a filing for every 818 households, the 20th highest rate among the states.

As foreclosures soared, so did South Carolina's unemployment. By January, that had reached 10.4%, the second highest rate, after Michigan, in the nation. It rose 1.6 percentage points higher than December, the biggest increase in any state, and it jumped 4.7 percentage points over the past 12 months, also more than anywhere else.

According to the Neighborhood Assistance Corporation of America CEO, Bruce Marks, poorly underwritten mortgages is still the main source of foreclosures in the state. "It continues to be problem mortgages," he said, "loans that were unaffordable from the start. But unemployment is adding to that."

In other words, we're seeing the second iteration of foreclosure activity, and it's large enough to swamp even moratoriums on foreclosures. This second wave of foreclosures is being powered by rapidly rising unemployment rather than shoddy lending practices. We're seeing the resonating effects of the housing death spiral now, and have more empirical evidence that it's feeding into itself, like Oroboros swallowing its own tail.

Falling housing prices have wrecked spending. That was stage one, in 2007. In turn, stage two saw lowered spending has wrecked the economy as consumption fell in 2008. The failing economy has wrecked employment as in stage three employers cut back over the last six months. Now we're seeing brutal evidence of that fatal fourth, recursive stage in 2009: Unemployment is in turn wrecking housing prices as people cannot pay their mortgages, leading to more foreclosures lowering housing prices, leading to more spending cutbacks by consumers, leading to more employment cutbacks as demand falls...

You get the picture. We're trapped now unless Obama's plans can stabilize housing prices. We are now fully locked into the death spiral of this recession, and are now facing the reality of a multi-year depression.

Each iteration of the cycle will only get worse from here on out. Keep in mind two things: One, the GOP thinks the economy can correct itself. Two, the speed at which the system breaks down will only increase.

Pray Obama's stimulus and foreclosure relief measures are enough to stabilize the tailspin we're in now. I don't think they are. I think more will be needed to stop the cycle of destruction. Much more. But sadly, it looks like Obama has no more political capital. Talk of another stimulus has been quickly quashed and lawmakers are content to just sit around.

Any hope of recovery in 2009 died last year. We were playing for 2010, and right now that's looking very much like we're running out of time. The next few months will tell the tale. If we're still looking at increasing foreclosures and unemployment when July rolls around, all bets are off.

I'm becoming more and more convinced now that we're over the cliff at this point.