Foreclosure-gate is a ‘cancer’

This is a great video by Christopher Whalen on Bloomberg. He is saying some of the things which are going to be working out over the next few years in the slow motion of foreclosures. The knock on effects will work out as a long downward pressure on asset classes, not a single Lehman like event:

You guys in in the media have a very tough time. You’re looking for events. You’re trying to cover the news minute by minute. This is cancer.

Whalen makes the case that this is a deflationary pressure eating away at the faith in the backing of Mortgage Backed Securities, the ability of banks and trustees to act operationally as essentially real estate trusts as they are forced to take bank nonperforming mortgages back onto their books. The asset side of bank balance sheets will get bigger (that is where loans go – as assets) and then they will need to be serially written down over time. The MBS holders will begin to see that they do not own a securitized debt, but rather unsecuritized debt and will need to off load it pushing prices of that to pennies on the dollar.

But Whalen sees the effect of the cancer eating further:

One of the things we have to think about big picture is property taxes. When there is a foreclosure people stop paying their property taxes.

This of course means that the Republican governors of many of the states will face a slowly declining revenue stream. Many of the republican governors have already stated their intention to cut drastically into the states services. These revenue will continue to fall as the foreclosure picture becomes bleaker. Whalen foresees a very poor denouement for state governments and for Obama:

I have been saying for a long time that Barack Obama is walking in Herbert Hoover’s shoes, and they are making the same mistakes almost unconsciously… when you have foreclosures what’s the next thing that is going to happen, not a federal moratorium, not a voluntary moratorium by lenders who can’t deal with their backlogs anyway, we’re going to have state moratoria the way we did in the 30’s; and the governors of those states are going to say “Folks stay in your homes, keep paying your property taxes, default on your mortgage.”