FedUpUSA

Archive for March 9th, 2010

Defaulted Loans May Haunt Seniors

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A little–noticed law could soon result in smaller Social Security checks for hundreds of thousands of the elderly and disabled who owe the U.S. money from defaulted loans and other debts more than a decade old.

Social Security benefits are off–limits to creditors, such as credit–card companies and banks. But the U.S. can collect debts to federal agencies by “offsetting,” or withholding Social Security and disability payments.

The Treasury currently withholds benefits of 3.1 million Social Security recipients to recover defaulted student–, farm– and small–business loans, unpaid income taxes, amounts veterans owe for health care, and other debts to the government.

Previously, the U.S. hasn’t been able to withhold Social Security payments to recover most debts delinquent for more than ten years.

But a provision in the 2008 Farm Bill lifted the ten–year statute of limitations on the government’s ability to withhold Social Security benefits in collecting debts other than student loans—for which the statute of limitations was lifted in 1997—and income taxes, where the limit remains 10 years. 

This means that a person who defaulted on a small–business loan in 1995, for example, and who is receiving Social Security could be notified that his benefits may be reduced each month until the debt, with interest, fees, and penalties, is paid. The Treasury can withhold 15% of the benefit, though it can’t be reduced to below $750. Tax debts have no floor.

The change will add more than $6 billion to the $75 billion in delinquent debt individuals owe the government, according to the Financial Management Service, the Treasury’s debt collection unit.

A Treasury spokesman says the new legislation “allows Treasury’s Financial Management Service to collect older debts and levels the playing field so that all eligible debts, regardless of age, are subject to debt collection. Treasury expects this legislation will result in increased collections of $10 million per year in delinquent federal non–tax debt.”

Though no one argues that people shouldn’t repay their debts, the change is coming at a challenging time for older Americans already pinched by mortgage woes, pension cuts and spiraling medical costs.

The shift applies to debtors of all ages, but Social Security recipients will bear much of the brunt. A Wall Street Journal analysis of Treasury Department data shows that Social Security recipients comprise a large and growing percentage of people from whom the Treasury recovers debts.

For years, most debt the Treasury collected through its “Offset Program,” came from withholding income–tax refunds. But with an aging population and growing unemployment, roughly 10% of the $4.3 billion in debts collected by the Treasury came from Social Security benefits in 2008, the latest figures available. That’s up from 1.6% in 2001, according to Journal computations that the Treasury confirms.

Though the law has expanded the age of debts that can be recovered, it hasn’t addressed the sometimes–Kafkaesque process debtors can face when challenging the validity of a claim.

Consider the predicament of Dr. Robert Steinberg, the founder of Scharffen Berger chocolates, who spent more than six years and thousands of dollars in legal fees appealing the Social Security Administration’s claim that he owed it more than $28,000.

Dr. Steinberg received disability benefits in the early 1990s while undergoing chemotherapy for lymphoma, a condition that ultimately claimed his life. Dr. Steinberg returned to work sporadically at a free clinic before co–founding the chocolate company.

Year later, the Social Security Administration notified Dr. Steinberg he was overpaid in the 1990s. In May 2002, with the matter still unresolved, the agency turned the debt over to the Treasury for collection.

In Oct. 2002, administrative law judge Gary Lee found that the Social Security Administration had never established the amount of the overpayment; had dismissed an earlier appeal “for spurious reasons”; had misinformed Dr. Steinberg and mishandled his later appeals; and had lost his file. He noted that Dr. Steinberg was “without fault,” and told the agency to stop its collections efforts.

Dr. Steinberg died in 2008, at 61. His lawyer, Peter Young, a former staff attorney for the Social Security Administration, has handled more than 100 overpayment cases, “very few of which were accurate,” he says. “Most people can’t find or afford help, and give up very quickly and end up with painful offsets on a fixed budget.”

An agency spokeswoman says mistakes can happen, but “over all, the process works.”

A Treasury spokesman says the new regulations require agencies seeking to recover debts more than a decade old to give debtors the right to review and copy their files, make payment arrangements, and apply for disability and hardship waivers.

But a recent dispute about a student loan shows that even with these rights, a person challenging an old debt can face hurdles similar to homeowners in foreclosure trying to modify a loan that has been resold.

In 2003, the U.S. began withholding $173 a month in Social Security benefits from Annie Brown, a paralyzed 75–year–old widow living in a nursing home to repay a defaulted $8,823 student loan the Education Department says she took out in 1989. The offset reduced Mrs. Brown’s benefit to about $980 a month.

Mrs. Brown said a granddaughter had forged her signature on a loan application. Her daughter and a lawyer spent more than four years disputing the debt with the owner of the loan, United Student Aid Funds, a student–loan guarantor that also was acting as one of the Education Department’s 21 debt collectors. USA Funds itself farms out various debt–collection activities to others, which it did in Mrs. Brown’s case.

Between 2003 and 2008, Mrs. Brown’s daughter and Lynn Drysdale, a legal–aid lawyer in Jacksonville, Fla., corresponded numerous times with USA Funds and two other debt–collection companies it hired. One letter from USA Funds warned that unless documents were received “within 30 days from the date this letter was generated…your case will be closed.” The letter was undated. Another letter required Mrs. Brown to refer to an attached document. There was no attachment. “I don’t know how a lay person could maneuver through this process,” says Ms. Drysdale. “Nobody seemed to know what was needed.”

In 2007, USA Funds denied Mrs. Brown’s claim, citing a recently passed federal rule requiring people claiming identity theft on student loans to obtain a criminal court verdict of the crime. That was impossible for Mrs. Brown; a statute of limitations for bringing a case had passed years earlier. In any case, she wasn’t alleging identity theft, but forgery.

Robert Murray, a spokesman for USA Funds, agrees that Mrs. Brown’s signature was forged. “It’s absolutely a forgery,” he says, “It \[the loan\] should never have been made.”

But he says that USA Funds couldn’t discharge the loan as a forgery because Mrs. Brown didn’t return a required form in 2005, and that USA Funds must rigorously defend claims. “There are borrowers who want to get out of a legitimate debt,” he says. “By the same token, we want to work with individuals who have a legitimate issue.”

Ms. Drysdale, the legal–aid lawyer, finally sought to obtain a disability waiver for her client. That process took more than a year, and was achieved only after Ms. Drysdale asked for help from the Social Security Administration’s ombudsman, who declined to comment.

In August 2009, the Education Department agreed that Mrs. Brown is permanently disabled, and discharged her obligation to repay the loan she never took out. The Treasury returned her withheld benefits in December.

Write to Ellen E. Schultz at ellen.schultz@wsj.com

On April 25, 2008, a group of concerned citizens, from across the country, who met on an online forum called Market-Ticker.org decided that it was necessary to start tying to wake people up to the fact they were being robbed. Not only were they being robbed, but the robbery was about to become brutal.

Just a few days after Bear Stearns was forcibly merged into JPMorgan, using YOUR tax dollars, we stood in downtown New York city, with signs and literature, educating the public about what had just happened. We were well-received by many people, but there were almost as many people who thought we were nuts.

After watching this video, and seeing for yourself what has happened since April of 2008, NOW how nuts do you think we are?

It has been a hard road to haul, trying to wake people up. It was hard being ridiculed and laughed at. It was hard seeing friends and loved-ones walking straight into an abyss of perpetual debt and even harder knowing that they were condemnig their children to the same fate.

Along the way, as economic conditions became more obvious, and our government’s role in perpatuating fraud and protecting the guilty at the expense of the innocent became more clear, finally, it appeared the cavalry might have arrived. FedUpUSA owes a debt of gratitute for Rick Santelli’s loss of composure on CNBC TV in February of 2009. What we had failed to accomplish, seemed to occur overnight: people started awakening from their stupor. ‘Tea Parties’ started springing up overnight in response to what can only be described as the cries of a modern-day Paul Revere, people got up off their couches and started taking their message to the streets.

Our work, however, is not over; it has just begun. Unless we address the ROOT of the problem, we cannot hope to derail the fraud and stop the corruption. The root of the problem is, no more and no less, our economic system. Our economic system is based upon a lie. The is that MONEY = DEBT. Our Founding Fathers knew this and proscribed a NON-debt denominated monetary system. This was intended to be money, the quantity of which was controled ONLY by the production of people – their human labors.

Absolutely all the corruption that now exists in our government can be traced back to the nature of our current financial system. Until or unless this system is changed, there is no hope to ever get out of debt.

Thankfully, there are some very smart people who have figured this out – and not only realize the source of the catastrophe we now face, but have come up with a solution:

Freedom’s Vision – In a Nutshell…

“It’s not WHAT backs our money, it’s WHO controls the QUANTITY!”

-Bill Still

Private Central Banks control the production of money in the United States, not our Congress as dictated by the United States Constitution. This has given them the POWER to control our economy and our politicians.

It is critical WHO controls the money system which is different than the banking system.

The system of backing our money with DEBT ensures that the system will fail, we are at or approaching the mathematical limits now. This system is controlled by Bankers, not Congress.

The quantity of money and debt is wildly out of control.

History shows that severe upheaval and “other events,” such as wars, follow such times. It is our intention to break that chain so that those other events do not occur.

Freedom’s Vision is comprised of three parts – Economic Reform, Political Reform, and Future’s Vision.

Our immediate mission is to:

“Enact monetary and political reform capable of transitioning our economy from its current debt and derivative entangled state to a prosperous & sustainable system that works to keep the quantity of money under control for the very long term.

Monetary Reform ends the process of debt backing our nation’s money at the Federal level, it establishes procedures to correctly measure our economy and through transparency coupled with checks and balances works with Congress to ensure that the quantity of money never gets out of control.

While the systems of control are simple and intuitive, the very difficult part is transitioning our economy from its current debt saturated and derivative entangled state to a sustainable and prosperous future.

Significant tax money would be returned to the people used to pay down debt for those who have it, thus deleveraging and providing immediate relief to all citizens. This first step also makes the banks more healthy.

Through the unique procedures contained within, the debts would be brought back to manageable limits on all levels. Derivatives would be untangled. All banks would survive the transition and come out of the transition ready to do meaningful and REAL business.

All businesses would immediately benefit as the economy rapidly, but in a controlled fashion, cleanses away the debt and leverage that is holding us back.

State economies will be cleansed and will take more control over their own destiny through the use of state chartered banks that will provide funding and bank control for that state, enabling low and no interest loans for the needs of the state much as the Bank of North Dakota has since the year 1919.

The dollar system that emerges would look and feel to most people almost exactly as it looks and feels today, but without the problems associated with never ending inflation.

Please follow this link to learn more details about Freedom’s Vision Monetary Reform

Political Reform works to separate special interest money from politics, thus ensuring that long term decision making can be made and that WHO controls the quantity of money remains in the hands of the people.

The short list of benefits can be found here – Benefits of Freedom’s Vision.

Swarm Politics is our method of implementing Freedom’s Vision.

Future’s Vision comes into play as the transition of our economy to Freedom’s Vision is being implemented. This third piece of the puzzle provides long term goals and focus for our nation working towards creating real and meaningful jobs while moving our nation ahead with purpose.

None of these procedures are yet set in stone, there is still much room to improve and work on them. We will be working towards creating actual legal language as we proceed. We need your help to create and enact Freedom’s Vision so that we secure our money, our freedom, our future.

Freedom’s Vision – Securing Our Money, Our Freedom, Our Future!

Could the US EVER pay off its debt? A mathematical perspective

By Debtor’s Prison

Greetings Fellow Inmates,

Today we will take a break from the URC series for a speculative, fun post of Numbers!  We will use one of our three trusty abaci to finally explore a statement we made initially in Count The Money v2.0: “The [US] debt WILL NEVER BE PAID OFF”.    The following is a greatly simplified model, and as such we will properly outline its variables, parameters, equations, simplifications, assumptions, uncertainties, weaknesses and inflection points, as we promised we’d do in the About Us section.   We will then of course weave this “technical” picture into a coherent story.  Please stick with the first half where we lay down the premises of the experiment, we want to make sure you understand the foundations of our thought experiment.   The real cool, mind-bending stuff and results are in the second half.  We promise that even for those NON-technical amongst you, we will provide enough visual support to clearly and vividly illustrate our points.   We will leave the actual equation definitions of our first-ever appendix, in order to not distract the less-math-prone Inmates.

We are setting out to construct a model to attempt to answer the following question.   Given the United States of America’s current TOTAL PUBLIC DEBT SECURITIES and the total size of the US economy, as measured by NOMINAL GDP, what is the likelihood the that United States debt will ever be paid off?  Remember, as we always say, that the TOTAL DEBT SECURITIES (ie, US Treasuries mostly) is not the total amount of debt since the government has many other liabilities that are equally enormous, such as Medicare, Medicaid, GSEs, etc.   So, in any real thorough analysis of the likely evolution of the economy and the debt, these additional liabilities would have to be taken into account.   Clearly, they would make the situation, the current system, even more unsustainable than it already is.    This falls outside the purview of the following model, where we will attempt to demonstrate through simple math that even when just looking at the securities, which are just part of the total debt, the system is already guaranteed to fail.  

OK, on to the basics of the model.    We have split up the exercise into two parts.   In the first experiment, only the INTEREST on the debt securities is paid down.    In the second, the INTEREST is paid down, as well as some PRINCIPAL, with the intent of eventually paying down the debt, as a percentage of total GDP.   In both cases, we assume that NO MORE DEBT IS ISSUED IN EXCESS OF THAT INTENDED TO PAY DOWN INTEREST, or at least until the end of our simulations, in 2333.   This is a very important point, as any deductions, conclusions or recommendations we derive from this model will be predicated upon this assumption.     It is clear a priori that the only chance for the debt to be paid off is if the US starts paying down some of that principal.    This, we will see, can only come from real economic output.

For those of you that are math, reason, logic and rigour junkies such as Ourselves, we strongly urge you at the moment to stroll down to the appendix and read the description of the model before returning to read right here.    It’s a very simple model.   For starters, we assume that there is a fixed interest rate and economic growth.   Of course, this is a far cry from reality, and we will not repeat nor apologize for the simplicity of this model.  It is intended to be simple, it is in fact conservative, since what we are trying to demonstrate is the inherent instability of The System.   And the great thing about the little Excel abacus is that we can make it dynamic, and allow you to play around with it, to really wrap your mind around the absolute ridiculousness of it all.   When you play around with some of the parameters you realize the sheer absurdity of our current system and where it is likely to lead us in the future.   The over-simplifications in the model are of course not trivial and thus impede precise predictive power, but you can say the same about most anything.   The over-simplifications are meant for the simple reason that they illustrate certain key points without the cloudiness of confusion, and because OUR POINT is not to predict the future, but rather clearly demonstrate the nonsensical foundations of our monetary system.   In this purpose, the oversimplifications of the model become marginal, in our humble opinion.

You might also notice that of course the model must be iterative, as a simplified model such as this must clearly be; meaning that the total NOMINAL US GDP and TOTAL US DEBT SECURITIES OUSTANDING (the two main variables in which we are interested) in any given year depend on the values in the preceding year.   This exactly parallels reality, so this model assumption is safe.

Below are the results of our experiment, for a sample CASE STUDY.    You can download the full Excel file here.   We highly recommend you download it, since you can simply play with the parameters, in the RED BOXES, to see the wild outcomes that come out, in other words, you can make ANY SAMPLE CASE you want.   You are encouraged to explore all the embedded functions, check them for consistency, modify them, use them, distribute them, no copyright.    For our purposes we chose as parameters the following: an interest rate of 5% (equivalent to weighted average yield of outstanding US debt securities), and economic growth of 4%.   Of course, we are being somewhat generous given what we expect of the economy, but since our simulation is over 322 years at the max, 40 years at the least, we figure this would be a good “average” value to use over that horizon.    As for the interest rate, we are also being generous, ie “pro”-system-biased, by assuming that the IR will be only 5%, given that we are likely to see SuperInflation and much higher yields in the mid-term future.     So, all in all, we would call these estimates for GDP and DEBT safe, pheasible and conservative ballparks.  Remember, this is the base case we are going to work with where annual GDP growth = 4% and the yield on US bonds is 5%

The following chart shows the result of a case study with the preceding parameters.   Notice that the chart is divided in two parts, the left when ONLY INTEREST IS PAID, and the right, where INTEREST AND PRINCIPAL are paid.   In the second case, in which we assume that principal is paid down, we show that parameter in another RED BOX, as % of GDP.      Notice that for both parts, we calculate the ratio of DEBT/GDP and of GDP/DEBT.   In our CASE STUDY, we assume that the US designates 2% of its annual real economic output to pay down principal on the debt.   

We can notice several things.   Let’s start in the case where the US only pays down its INTEREST.   Then we see that by 2020, the total DEBT/GDP ratio will be 0.90.   By 2050, 1.20 (ie, the total DEBT outstanding is 20% larger than the size of the total US economy).   By 2333, the total DEBT will be 78 times larger than the economy!     In the case where the US uses 2% of its annual GDP to pay down PRINCIPAL, in addition to the interest, then we see that it is actually WORSE.   Up until 2050, things look pretty similar, but they begin to diverge about 2100.   In this case, by 2200, the total DEBT will be 297 times larger than the economy.    Then, in 2207, the GDP goes negative!  Clearly this is a sheer absurdity and the model has “broken down”, partly indicating a “systemic failure”, since remember that THEY do want us to believe that the system works in such simple fashion and there aren’t any nefarious Invisible Hands lurking around. 

Now, why exactly does the GDP go negative? Well, that happens because the debt NEVER stops growing (at least in this base case we are working with now), so at some point the interest payments on the debt become so large that even if we only pay 1% of the interest with real economic output, the cost is so large relative to the economy that it eats it all up.   Everyone dead.   Everything approaches zero; somehow our “system” managed to complete eradicate ALL VALUE FROM ALL THINGS.    Let’s look at what happens to our base case (GDP growth = 4%, Yield = 5%) when we only pay INTEREST and where we use different distributions of DEBT and OUTPUT to pay down the principal.   In other words, at some point we will pay some of the interest with mostly new debt, run the spectrum, until we pay for the interest with mostly real output.   Here are the graphic results.

Yikes!  Notice that given our base case, paying for 99% of the interest by issuing new debt, is the only level shown that prevents GDP from turning negative by 2333.   Anything less than that, even 95/5 is bound to result in sharply negative GDP eventually, with increasingly parabolic results.   In all cases, the debt grows parabolically, but such is the nature of compounding interest and we shouldn’t be surprised.    Perhaps you think we are being facetious by extrapolating all the way to 2333, I mean, really, who cares about what happens to their GreatGreatGreatGrandchildren?   So, let’s take a smaller-window view into the exact same thing, and selfishly look only until 2050.

Very interesting.   For starters we notice that of course, the discrepancy is not as huge.   When we change from paying for the interest with almost all NEW DEBT all the way to paying for the interest with almost ALL REAL OUTPUT, the outcomes are largely the same.    Between 2030 and 2042, the TOTAL US PUBLIC DEBT will surpass the size of the economy.    Big surprise.  

Alright, so it has now been unequivocally shown that in this simple base case, the US can NEVER be paid off if they limit themselves to paying only the interest.   We believe that this statement of course applies to all debt, anywhere, at any time, but we would welcome some debate on the matter.    Now, let’s see if there is any chance of paying off the debt if the US actually intends to pay principal.

In the CASE STUDY presented in the first chart, we saw that using 2% of GDP to pay down the principal actually resulted in a WORSE economic condition and faster deterioration towards ZERO GDP, or the ELIMINATION OF ALL VALUE.   However, by playing around with the parameters we realize that this is NOT always true.   We found that if the US were to designate 6% of all REAL ECONOMIC OUTPUT to paying down the INTEREST, then the DEBT would be in effect paid off, before GDP hit zero.     Voilá! Using 6% of GDP to pay down interest would result in the DEBT being paid off in 2074, and please look at the Excel file and notice how GLORIOUS it is that after the debt is paid down, the GDP begins to grow parabolically.   Of course!!! This is what SHOULD happen, in a RATIONAL DEBT-FREE world.    Below is a graphical sample of simulations all the way to 2100, using different values for the percentage of GDP assigned to pay down PRINCIPAL.

Wow, many interesting things once again.   Notice that when the US designates ONLY 5% of its GDP to pay down the debt the debt begins to decrease (as does GDP of course), but there is a point in which the debt begins to rise again, and once again runs away.       Why does this happen? Well, as GDP decreases, so does the amount of principal the US is able to pay, at some point, the principal payment becomes LESS than the mounting interest, so debt begins to rise again, never to fall for the rest of time.   At 6% however, this “barrier” is overcome and the debt can in fact be paid down.   So, between 5-6% we have another inflection point.      If 6% is designated, then the debt would be paid off in 1974; if 10% is designated, then it would be paid in 2033, and if 15% is designated the US would be debt free by 2023.  

So what are the chances of this happening?   Slim to none.   All we did was show under what circumstances it would even be possible to pay down the US debt.     So, if reality actually mirrored this greatly simplified model (it doesn’t), if Americans learned to live frugally for an entire generation (they can’t), if the macroeconomic conditions actually maintained the levels of our base case (they won’t), and the US government instituted serious fiscal reforms to bring this about (hahaha), then the US DEBT COULD BE PAID OFF.

Ultimately however, it is important to remember that THEY don’t want the debt to be paid off.   Of course not, that is how they keep us slaves.   But enough about blaming THEM.   It is time to blame OURSELVES.   Here it is, in vivid TechniColor, the sheer absurdity of this House of Cards, this Tower of Basel.   So why do you still participate in this system Inmates? 

“Because I must”  Why? 

“Because I have no other choice”  Why? 

“Because I don’t have enough firepower” Why do you need firepower? 

“Because the system gives me benefits and comforts which I’m happy to pay for?”  Even at the risk of death?

“Because I don’t care enough”  You should.

May your capital be safe and your investments prosperous,

MAAA

—————————-

APPENDIX

Let:

gOD(Y) = gross Outstanding US Debt securities on year (Y),

IR = representative interest rate of total US debt securities, ie, the yield on the weighted average maturity of outstanding US debt ,

INTEREST(Y) = the interest rate cost on year Y, equal to gOD(Y)*IR

GDP(Y) = nominal US GDP on year Y,

GDPchg  = the annual percentage change in nominal US GDP, in decimal units,

DebtPer = percentage of the annual interest cost that will be paid through new debt issuance,

OutputPer = percentage of the annual interest cost that will be paid through real economic output

PrinPer = percentage of nominal US GDP to be used to pay down principal,

PRINCIPAL(Y) = the total principal payment on year Y, equal to PrinPer*GDP(Y)

Then, the model stipulates that:

GDP(Y) = [ GDP(Y-1) – OutputPer*INTEREST(Y-1) – PRINCIPAL(Y-1) ]*[1 + GDPchg];

gOD(Y) = gOD(Y-1) + DebtPer*INTEREST(Y-1) – PRINCIPAL(Y-1) ;

where

GDP(Yi), and gOD(Yi) are the initial conditions, in our case

gOD(2010) = $11.9tr

GDP(2010) = $14.5tr

Mortgage Principal Writedown Won’t Save Housing

By: Diana Olick

CNBC Real Estate Reporter

And so it begins. Big gun lawmakers are making the move toward principal writedowns as the last resort to save the housing market.

In a letter to the CEOs of Bank of America, Wells Fargo, JP Morgan Chase and Citigroup, House Financial Services Committee Chairman Barney Frank wrote, “To save homes on a large scale, we must move past temporary modifications in interest rates or terms and focus on permanent principal reductions that result in truly sustainable mortgages.”

I agree and disagree with that statement: I agree that temporary modifications (even though the Treasury calls them permanent) are going to keep some borrowers in their homes for a while, but are really just prolonging the agony. I disagree that principal reductions will create truly sustainable mortgages.

The problem is prices. Home prices have fallen so far in the hardest hit areas, the areas where the bulk of the troubled loans are, that banks would have to write down principal 30 to 50 percent to put borrowers back in the green. Accounting rules require that banks write down the value of those loans on their books, and experts tell me that if banks really accounted for all the losses in the home loan market, they’d all be insolvent.

That’s why the Obama Administration has created this kind of shell game in the first place.

I stole that shell game idea from housing consultant Howard Glaser: “We’re spending tens of billions of dollars on a tax credit to get people to purchase homes, we’re spending federal money to keep them in their homes through the modification program, and now we’re going to pay them to move out of their homes. This is not a sustainable system for the housing market. It’s a shell game. Bernie Madoff could have created this system,” Glaser told me today.

Chairman Frank is focusing on second liens, blaiming them for holding up the first lien modification process. But the largest second lien holders are also the largest first lien holders. “Large numbers of second liens have no real economic value,” writes Frank. He’s right.

These lenders are getting pennies on the dollar even when they do get some kind of payoff, and they get nothing in a foreclosure. His theory is that if you get rid of the second lien then the first lien can be written down just fine and dandy. But the banks don’t want to write down the first liens either. Why? Simple math.

Politicians want to keep borrowers in the homes because that’s the compassionate thing to do. The big bad banks just want to cut their losses right? Well, maybe not. Sure they want to cut their losses, but they also want to save the value of the housing market, and foreclosure is how they’re doing it.

Take Las Vegas as an example. Foreclosures are the whole market there, but there is actually very little inventory on the market. Why? Because banks are holding onto inventory, releasing it slowly and measurably, so as to put a bottom under prices.

I realize this is not the compassionate argument to make, but the fact is that most troubled borrowers are never going to get out from under these bad loans, even with reduced principal, and many many of them don’t want to. If you foreclose on the properties, take them back, hold them a bit, don’t write down the losses, and then slowly sell them back onto the market to hungry cash investors or buyers with good, well-underwritten loans, then home prices will stabilize.

As for the borrowers, the rental market is ripe. Rent rates are low, vacancies are high, and the hit to personal credit isn’t going to matter as much a few years from now when banks are desperate once again sell mortgages.