Economy Watch: German High Court OKs Euro-Zone Bailout; Underwater Mortgages Dip

Germany's supreme constitutional court gave the green light for the country to participate in the proposed European bailout of countries that need it most. On the national end, the percentage of underwater mortgages dropped in the second quarter.

The euro-zone, and probably the world economy, dodged another bullet on Wednesday when Germany’s supreme constitutional court ruled that the country can participate in a proposed permanent European bailout fund, formally known as the European Stability Mechanism. The court did set some conditions, however, mainly that the government can’t increase the Federal Republic’s $243 billion contribution without parliament’s say-so.

The thinking behind the ESM, which will total about $644 billion, is that it will support the worst-off economies of Europe (Spain and Italy in particular) while they get their fiscal houses in order. That’s the theory, at least, but the usefulness of the fund won’t be tested until it’s fully functional, after Germany and Italy ratify the treaty that creates the ESM.

Still, to the extent that economics is a matter of promoting confidence among investors and consumers, the ruling seems to be a balm (for now) for nervous markets. The alternative, after all, would have been a sharp, sudden increase in doubt about the future of the euro–gasoline on the fire, in other words. European equity markets were up on word of the ruling on Wednesday, and the euro gained ground against the dollar as well.

Wall Street also seemed to take the news from Germany well, though of course investors are also waiting for word on QE3–and many of them believe the time is nigh for the stimulus. In any case, the U.S. equities markets barely moved on Wednesday, with the Dow Jones Industrial Average up 9.99 points, or 0.7 percent, and the S&P 500 and the Nasdaq gaining 0.21 percent and 0.32 percent, respectively.

Fewer Mortgages Underwater in 2Q

More relatively good news from the residential real estate industry: CoreLogic reported on Wednesday the percentage of underwater U.S. mortgages dropped in the second quarter. As of the end of the second quarter, about 10.8 million, or 22.3 percent, of all residential properties with a mortgage were in negative equity, down from 11.4 million properties, or 23.7 percent, at the end of the first quarter of 2012.

An additional 2.3 million borrowers possessed less than 5 percent equity in their homes, which CoreLogic calls near-negative equity, at the end of the second quarter. Together, negative equity and near-negative equity mortgages accounted for 27 percent of all mortgaged residential properties nationwide in the second quarter, down from 28.5 percent at the end of the first quarter in 2012.

About 600,000 borrowers reached a state of positive equity at the end of the second quarter of 2012, adding to the more than 700,000 borrowers that moved into positive equity in the first quarter of this year, according to CoreLogic. The movement is mainly because an improvement in house price levels.