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Archive for the ‘Mortgages’ Category

The housing market will remain crippled until we eliminate perverse incentives to  financialization and speculation, Fed/Federal intervention and all subsidies/giveaways.

If there is one goal that the financial cartels, their politico apparatchiks and the public might actually agree upon, it would be restoring the housing market to health. This is because the financial cartel, their politico lackeys and homeowners would all benefit from the stabilization of housing values at current levels:

1. SDI (systemically dangerous institutions) a.k.a. too big to fail banks,  would avoid insolvency by keeping all their mortgage assets marked to unicorns-and-pixies, i.e. artificial valuations.

2. The political class of toadies, lackeys and grifters would finally free itself of an unsolvable problem that keeps highlighting its incompetence and irrelevancy.

3. Homeowners’ most treasured fantasy–that valuations will rebound and thus restore their dreams of  “free” home equity– will be reanimated.

In other words, everyone exposed to losses in the corrupt, speculative apex of malinvestment  known as the U.S. housing market doesn’t want a truly healthy housing market, they just want  a return to the bubble era.

Sorry, folks, ain’t gonna happen. (And yes, I own property, too, but it is what it is.) Bubbles do not reinflate, even with the Fed chanting its Keynesian Cargo Cult mantras (“zero interest rates forever!”) and waving dead chickens over the embers. The conditions which inflated the bubble cannot be called up by incantations; faith in the system has been destroyed, and only the complete socialization of the mortgage market by the forces of Central Planning–the Fed and the Federal government’s Socialized Mortgage Makers, Fannie and Freddie– have staved off the complete collapse of prices which would have wiped out the banks and cleared the market via actual capitalism in practice, i.e. a transparent marketplace which is allowed to discover price.

Despite the fact that a truly healthy housing market is anathema to the Status Quo and current property owners sitting on huge mortgages, let’s lay out the necessary characteristics of such a housing market. A lot of this will strike many of you as counter-intuitive, but that only highlights the pervasiveness of the speculative propaganda that slowly hollowed out our culture’s previous understanding of housing and replaced it with a devilishly magnetic financialization model.

In the previous era (when income and prosperity were more evenly distributed), housing was in essence a  “patient investment” that offered low-cost shelter and a type of forced savings: by paying a mortgage for 30 years, the homeowner built a nestegg of savings that more or less kept up with inflation. With the mortgage paid off, the homeowner enabled a low-cost retirement  (no more mortgage payment, and no rent due, either) and the eventual transfer of a valuable asset to their children.

Contrast that to this era’s perception of housing: fundamentally, housing is a speculative vehicle which is available, thanks to low/no down payments, government giveaways and low interest rates, to Everyman and Everywoman. The idea of actually staying in one home long enough to pay off a 30-year mortgage–or even the idea of paying off a mortgage–are as antiquated as stone tools.

Paying off a mortgage? That’s Squaresville, man; the name of the game in financialized markets like housing is to buy and sell constantly, churn, baby, churn, with an eye on “flipping” for a quick speculative profit.

Housing isn’t a store of value, it’s a way to leverage zero savings and a bit of income into speculative wealth.

This financialization of housing was the inevitable consequence of the Federal Reserve’s money-printing and low interest rates, as explained in this brilliant essay on Zero Hedge:Winners And Losers: The New Economy:

You obviously cannot print wealth, but if you try that fiat money distorts the entire economy by directing investment to things which appear to appreciate but what is really happening is that the dollar is depreciating. As a result, fiat money and real capital are invested in  financial assets because they appear to have greater yields than returns from the production  of goods. Prices rise (price inflation) and it creates the inevitable boom which always busts. The fall out is that we are stuck with things people don’t want (in the present re/depression it is housing). And we fall for it every time.This has led to the phenomenon that Messrs. Frank and Gross describe: the financialization of  the economy.

If we think this through, then we are forced to conclude:

1. The first step toward restoring a healthy housing market is to eliminate the tools and forces of financialization: low/no down payments, low interest rates, securitized mortgages, government giveaways, Federal Reserve buying of mortgage-backed securities, and the Federal “Socialism Is Good When It’s the Mortgage Market” agencies, Fannie Mae and Freddie Mac.

Yes, that is step one: eliminate the Federal Reserve, Fannie and Freddie and all housing subsidy programs. In other words, restore a transparent, private-sector mortgage and housing market freed of Central Planning manipulation, cronyism and corruption.

The goal is her quite simple: restore “patient investing” by eliminating all the  perverse incentives for speculation and the resulting culture of rampant cheating, obfuscation, lies, deceit via omission and corruption–the inevitable consequences of financialization.

Requiring a 20% down payment is viewed, perversely, as an impossibly restrictive standard; yet requiring a substantial down payment is the only way to incentivize “patient capital” and squeeze out speculation and its destructive culture of deceit and churn.

2. Focus resources on neighborhoods that can be adequately supported by property taxes at a level 25% lower than current taxes; abandon the unsustainable exurbs and suburbs.

The one thing we can safely predict is that housing values and thus the owners’ ability to pay high property taxes are both eroding. Thus property taxes will decline, either via falling housing prices, voter revolt or wholesale abandonment of the properties. That is the basis for anticipating lower property taxes going forward.

The postwar suburban model of development is fundamentally a pyramid-Ponzi scheme based on eternal growth: more homes and more residents will generate higher tax revenues that will enable the future maintenance of the new roads, schools and other infrastructure that are added year after year.

This dynamic is explained in this excellent slide presentation:A Complete Guide To The Ponzi Scheme That Is Suburban America(via Adam T.).

So what happens when growth stops and taxes contract? The model falls apart, quite literally. There is no longer sufficient revenue to maintain the sprawling expanses of roads, schools, parks and the city staffing which also expanded every year along with growth and taxes.

What happens when the tax base contracts? Roads crumble, parks are left to become overgrown homeless encampments and those who can leave for more liveable environs do so. There is anecdotal evidence that the Pareto Principle comes into play: when 20% of homes are underwater, values dive, and when 20% of homes are abandoned, the neighborhood deteriorates.

I first addressed this dynamic about four years ago: The Great Fall: How Suburbs De-gentrify to Ghettos  (November 20, 2007)

There is nothing mysterious about the process:

A) There are upper limits on how much increasingly strapped homeowners can pay in property taxes

B) Maintenance costs are relatively fixed and can only be deferred

C) When revenues fall below minimum maintenance costs, the neighborhood deteriorates

D) When 20% of the homes are distressed, abandoned or foreclosed, then a positive feedback loop is triggered: those still able to move will do so, followed by those who give up trying to maintain their mortgages/property

Clearly, those neighborhoods that harbor dense congregations of homes and enterprises offer a compact footprint to be maintained, and a diverse network of households and enterprises to share the tax burden of that maintenance.

3. Require all lenders, banks, the Federal Reserve (a private bank) and all government agencies to mark their housing and mortgage assets to market. This will force two other essential actions: write off all bad, uncollectable mortgages and liquidate insolvent banks, lenders and agencies via open, transparent auctions of homes and other real estate assets.

There is nothing mysterious about this process; the government undertook a similar program in the early 1990s to clean up the savings and loan debacle spawned  by corruption and speculation run wild.

This will dramatically lower the value and thus the price of housing in most markets around the nation. There is no substitute for letting a transparent open market discover price. The alternative is a culture and economy constructed of lies, bogus accounting and eventually, a total loss of faith in financial and political institutions.

Another part of the “discovery” process should be the investigation of fraudulently originated mortgages and MBS (mortgage-backed securities), with the perpetrators of the frauds brought to justice and the fraudulent debt liquidated. Messy, yes, easy, no, essential, yes–if you want to restore faith in a hopelessly corrupted, fraud-based, opaque, manipulated market for mortgages.

Needless to say, the murky/non-existent title documentation for millions of mortgaged homes will also have to be addressed on a national level.

4. Owning a home as a patient investor should be cheaper than renting.  The down payment is capital invested, and the yield on that capital is lower shelter costs.

The benefit/yield on renting is that it doesn’t tie up scarce capital and it does not commit the renter to staying in one locale.  These benefits require a premium, i.e. renting is more costly than buying and owning a home as a patient investor.

In a market with too many homes and too few qualified buyers (especially if subsidies and giveaways were removed from the system), this rent/buy equilibrium would likely be established by home prices dropping significantly.

5. A truly liquid market for housing must be re-established, and there is only one way to do so: Only a transparent, private, free market of mortgages and houses will create a  truly liquid market that enables buyers to purchase a home and have some reasonable expectation of being able to sell it in a reasonable length of time to willing, unsubsidized private buyers.

Right now, the housing market is so constipated with bad debt, politically untouchable banks, Central State manipulation  and the corrupting grip of speculative financialization,  that no buyer can be assured that he/she will be able to sell their home in the future.

This leads to a very rational hesitation: in a weak, fractured and increasingly volatile labor market, it is risky to commit oneself to  buying a house that could rapidly decrease in value and cannot be sold.

Talk about a bad deal: not only is one’s capital trapped, you’re physically trapped in an asset which could fall dramatically in value if the constipated market ever clears. No wonder the housing market has been reduced to ill-informed foreign investors (“I can offer you this bridge in Brooklyn for very cheap, cash only”), people with a mere $100 skin in the game (Got A Hundred Bucks? Buy A Home (Or Virtually Anything Else) Using 2,000x Non Recourse LeverageZero Hedge) or those funded by other government giveaways and subsidies.

There is no other way to restore a healthy housing market than these actions:

1. Eliminate financialization by eliminating the Fed, the insolvent banks, the mortgage securitization racket and all the incentives for speculation, corruption and deception.

2. Clear the market by writing off all bad debt/mortgages and auctioning off all bank/lender assets in a transparent, free auction market.

3. Require 20% down payments and let interest rates rise to what private capital demands as fair compensation.

4. Encourage patient investing, not speculation.

5. Conserve resources to neighborhoods that are sustainable in eras of contracting tax revenues.

Unfortunately for future generations who might like to own a home whose price was set by the market rather than a Central State devoted to “saving” predatory banks and Wall Street’s financialization machine, Wall Street and the banks are terrified of a healthy housing market,  because an unfettered “price discovery” would doom their marked-to-Tinkerbell house of cards.

The nation, and its future homeowners, deserve better.

Charles Hugh Smith – Of Two Minds

If anyone would know, it would be Bill Black.  Here he discusses how Obama’s new housing plan helps the BANKS at the cost of the taxpayers.

Visit msnbc.com for breaking news, world news, and news about the economy

 MSNBC Video

How better to corral restive underwater debt-serfs than to herd them into accepting a new, “better” set of lifelong servitude shackles?

President Obama is taking credit for a new government plan to “save homeowners.” That is of course pure propaganda to mask the plan’s true goal: the perfection of debt-serfdom.  The basic thrust of the plan is straightforward: encourage “underwater” homeowners whose mortgages exceed the value of their homes to re-finance at lower rates.

The stated incentive (i.e. the PR pitch) is to lower homeowners’ monthly payments via lower interest rates.

This is the Federal Reserve’s entire game plan in a nutshell:don’t write off any debt, as that would reveal the banking sector’s insolvency, but play extend-and-pretend with crushing debtloads by lowering the cost of servicing the debt.

The key purpose of this “plan” is to leave the principle owed to banks on their books at full value while ensnaring the hapless debt-serf (the “homeowner”) into permanent servitude to the banks.

If the net worth of your home is a negative number, then what exactly do you own? You have the right to occupy the shelter, and you own the debt. So how is this any different from a lease? There is no equity, and no equity being built: there is a monthly payment in return for the right to occupy the dwelling.

The difference is the leaseholder can move at the end of the lease with no debt obligations.The underwater “homeowner” debt-serf is trapped by his/her mortgage into what amounts to lifetime servitude to the holders of the mortgage.

All the plan does is perfect this debt-serfdom.In a truly capitalist, transparent, free-market economy in which assets were always marked to market, then mortgages that are grossly misaligned with the market value of the house would be written down and the mortgage holders forced to book the loss.

Over-leveraged lenders, i.e. the “too big to fail” banks which dominate the U.S. mortgage market, would see their capital reduced to zero by the writedowns. They would be declared insolvent and liquidated. Their shareholders and bondholders would book losses.

But these losses are unacceptable in our crony-capitalist/cartel-capitalist Status Quo,so the “solution” to systemic insolvency is to manipulate the debt-serfs to keep paying, and thus keep the unicorn-and-pixies valuations of  real estate on the banks’ books at full value.

This is the same game that Japan’s lenders and Central State have played for two decades,and it remains the heart of their failed policies and decaying economy.  In Japan, lenders papered over their bad debts with all sorts of back-door machinations: they extended new loans to debtors so the debtors could continue to make interest payments, they created zombie accounts  filled with delinquent loans that were still kept on the books at full value, they wrote new loans at near-zero rates so interest payments were lowered, and so on–the same ploys and games being played by the Federal Reserve, the Federal government’s housing lenders (Fannie and Freddie) and the banks.

The propaganda machine is running at full throttle, of course, with the usual parade of toadies and lackeys trotted out to say what a great and wonderful thing this plan is for poor homeowners.  But industry analyst Ken Rosen inadvertently revealed the real motivation for the plan: to keep underwater homeowners from “walking away” in so-called “strategic defaults.”underwater homeowners thrown lifeline by Obama(Mercury News).

Why is strategic default anathema to the Status Quo? Because the abandoned house will eventually have to be sold on the market, and at that point its true value revealed. The mortgage holder will then be forced to book a stupendous loss, and the inflated-paper “asset” on the books vanishes.

The Big Lie here is implicit: “your house will someday come back in value, so hang in there, debt-serf.” No, it won’t.  The bubble has popped, and the mania has left town. Housing will retrace to pre-bubble valuations circa 1996-98.

As usual, the Plan is all about managing perceptions and political theater:we’re here to help the little guy, the struggling homeowner; we are in charge, we have a plan, we’re competent, this will fix the housing market.

Too bad they’re all lies.Perception management is not the same as actually solving the underlying problem, yet perception management is the Status Quo’s response to every problem.

The perfection of debt-serfdom is now complete. First, make student loans “necessary” for the “good life” and then make that debt permanent and unbreakable. In other words, institutionalize debt-serfdom and lifelong servitude to the financial sector.

The re-fi “plan” herds potentially rebellious mortgage debt-serfs into new corrals, with the incentive of slightly lower interest rates. The lifetime of servitude to financial Overlords remains firmly in place. That’s the “plan.”

The Plan has other flaws as well:

Got A Hundred Bucks? Buy A Home (Or Virtually Anything Else) Using 2,000x Non Recourse Leverage(Zero Hedge)

On the Administration’s Latest Potemkin Help Struggling Homeowners Plan (Naked Capitalism)

Charles Hugh Smith – Of Two Minds

Interesting presentation with slides and video can be viewed here…

Related educational information:

1. Robosigners and Other Servicing Failures: Protecting the Rights of RMBS Investors
2. Association of Mortgage Investors Letter To JPMorgan Trust Administration RE: Notification of and Request to Address Pervasive Issues in RMBS Trusts
3. Ocwen Scoops Up Saxon Servicing Rights
4. Invitation: County Sheriffs’ Role in Protecting Individual Liberties
5. Live Webcast Wed May 4th 9AM EDT | Presentation to Michigan House of Rep on Mortgage Fraud by Bill Bullard and Curtis Hertel, Jr.

The coming failure of Operation Twist – The Federal Reserve resurrects a program from the 1960s named after the Twist Dance.  Appropriate timing for a Dancing with the Stars nation.

The Federal Reserve has literally run out of ideas.  Operation Twist, a throwback to the 1961 action taken by the Fed named after the Twist Dance fad at the time, is now back in 2011.  This time the Fed plans to purchase $400 billion of bonds with 6 to 30 year maturities while selling bonds with shorter term maturities.  The Federal Reserve continues to deal with a debt crisis with more debt.  The market has quickly spoken shaving off 700 points in two days and many global markets are now solidly back in bear market territory.  The problem with this program is that it assumes that the only problem with the economy is that not enough people are borrowing and spending.  The Fed goes after interest rates like a lion after a zebra.  Interest rates are not a problem.  Rates are at historical lows.  The problem of course is that household income has gone south for well over a decade.  The only true winners with these low rates are the banks who can access cheap money to wildly speculate in the stock market casino.

Operation Twist largely benefits the too big to fail banks

The recent Federal Reserve move only makes it cheaper for banks to borrow and speculate.  As the above chart highlights, banks already have an abundant amount of money in their excess reserves.  Banks before Operation Twist had $1.6 trillion in reserves that are readily available to lend to the public.  The problem is twofold:

-1.  Banks are keeping this money because of their horrific balance sheets.

-2.  Banks are now back to using due diligence and with the average per capita income at $25,000 not many credible borrowers are coming to the table.

In other words, these excessively low rates continue to bailout the too big to fail banking syndicate.  This comes at the expense of savers and those that are prudent.  The average savings account in the U.S. is paying roughly 0 percent while banks can charge 15 percent or higher on credit cards.  Banks can simply keep that $1.6 trillion and actually earn interest on it.  Wouldn’t you like to get free money and earn easy interest on it?  The mission of the Fed is to protect the banking system and this is like rule number one of the banking Ten Commandments.  The success of the overall economy is only a factor if it aligns with banking profits.

Operation Twist is also a failure because households in America are in the process of deleveraging after reaching a peak crisis in debt.  Households are maxed out.

Read the rest at My Budget 360

….especially when it comes to your mortgage payment.

Foreclosure Hits Nearly Paid Off Home

View more videos at: http://nbclosangeles.com.

You don’t have to be upside down on your mortgage to lose your house.

The Bernstein family is packing up and preparing to move out of their Sylmar house Friday after 25 years. The mortgage was practically paid off.

“What I owed on the loan was $37,000,” said Raymond Bernstein, who bought the house with his wife Diane. “I have so much equity I would be an idiot to lose the house.“

Bernstein insists a series of accidental missed payments led to foreclosure.

“My bank got bought out and my automatic payments got shut off without my knowing, then the mortgage owner then sends a notice I am behind. “

Bernstein says he worked out a repayment plan with Citibank. The bank confirms Bernstein made the first payment of $4,000 in January.

But what happened to the second payment is in dispute and the subject of a lawsuit.

Citibank says the Bernsteins missed the second payment.

Bernstein says he mailed it, “they then claimed not to get a payment and they foreclosed and sold it at auction.”

 The 2,000 square-foot, 3-bedroom, 3-bath house was sold at auction in March for $255,000.

Since the Bernsteins owed just $37,000, who gets the $218,000 in profit, the equity that the Bernsteins had built up after paying into the mortgage over the last 25 years?

“The lender, not the family gets the money in a foreclosure, “ says Lori Gay, president of Neighborhood Housing Services, a nonprofit group that represents homeowners for free who are on the verge of losing their homes.

“It’s awful … when you lose your life’s savings and your equity,” Gay said. “Awful. In foreclosure, no one wins.”

This would be a tough situation for any family, but Raymond and Diane Bernstein have an autistic son who needs a lot of care.

Jeremy is 11 and says he is sad about moving. “It’s been the worst, scariest thing that’s happened to me, “ says his mother Diane.
 

The Bernsteins have filed two lawsuits claiming illegal foreclosure. But Raymond, who sells insurance for living, can’t afford a lawyer and has chosen to do it himself. He admits it’s not going well.

Citibank would not comment on the Bernstein’s case but sent this general statement about how they deal with foreclosures:

“We work very hard to keep borrowers out of foreclosure and in their homes. We often offer borrowers who are seriously behind on their mortgage a repayment plan. If they fail to make the payments, however, the plan is cancelled.

“We attempt to contact the borrowers by mail and telephone to advise them of the plan’s status. If the account becomes delinquent due to missed repayment plan payments, we are normally unable to offer another solution. We regret we were not able to offer further options to these homeowners.”

The Bernstein’s case reminds us that in this economy, even if you are just a few years away from owing your home free and clear —you could still lose it, if you miss enough payments.

If you are having trouble, or you are upside down, Neighborhood Housing Services offers free services.

NBC Los Angeles