Underlying problems with the banking structure and mortgage financing

For years the US and world economies have had excess stimulus caused in large part by escalating home prices.

The excess “equity” would be cashed out and spent on vacations, big screen TVs, college education for the kids, etc.

As previously mentioned, one of the reasons this is a problem for economic stimulus is that if you spend X amount of money from credit now, that is X amount of money plus interest that you won’t be putting into the economy later.

In terms of cash flow, that only helps banks.

If you look at the basic structure of the transactions though, the banks are actually losing.

The whole home equity situation is something like a ponzi scheme for banks.

The old purpose of mortgages was that they were to be ultimately paid off.

When mortgages are instead something more like a line of credit, the structure of the situation changes.

If the mortgages are never really intended to be paid off, the banks require some other bank to buy out their mortgage.

To fully understand the dynamic you have to look at all banks together.

If they are all making huge loans on property, which could never be paid out in 30 years, they are collectively moving more and more money away from more or less the same pool of “equity”.

I hate that word, “equity”, because stripped down it is usually relativistic balderdash.

The equity of a thing doesn’t necessarily have anything to do with the value of a thing.

What is a house? Slowly rotting sticks in the ground.

The only objective measure of value is the collective number of man hours that it took to put it together, including the production of the materials, or the same figure for what it would take to replace it.

“Equity”.

Equity is betting your company that there will always be another buyer and company out there that will pay more for rotting sticks in the ground.

Because beyond the value, all you have is a social convention that somebody else will always buy you out at the same price or greater. That social convention isn’t enforceable as even a handshake agreement. It disappears as soon as nobody can afford to buy you out.

A house should be a bad investment, from a purely investing point of view.

Like gold, the house doesn’t produce anything.

Worse than gold, it is an asset where the primary source of objective value is constantly depreciating due to wear and tear and requiring a higher proportion of upkeep.

Unlike gold, it provides for a basic human need- a roof over your head.

But like gold, viewed over the long term and over the maximum number of parties, housing is always a net loser as an investment.

It is true that the savvy investors can make a killing. But in assessing the value of a practice you can’t look at just a successful few in isolation.

And if any investment that doesn’t produce anything keeps inflating in relative price, you will without variation have the same structure as a ponzi scheme, whether the practice is legal or not.

Suppose ten banks have 10,000 properties mortgaged. They adopt a practice between them of ever increasing prices of the homes and letting people borrow agains them.

If the average price of those 10,000 homes quintiples in price in 10 years and he average mortgage quadruples in price, does that mean that the banks are in better shape or more secure?

Not necessarily, because at base they have the same 10,000 homes as collateral staked against four times the debt.

If that debt in turn reflects debts the bank owes to others, what you have is fixed exposure and variable collateral.

Quite apart from the ponzi aspects of mortgages that are never intended to be paid out, what happens if 1,000 of those 10,000 homes go into foreclosure? If moving those homes means dropping the average price to only triple the price it had been 10 years before, now the banks are painted into a corner and whatever they choose is wrong.

If they move on the homes in foreclosure they destroy the value of all their other collateral by increasing the supply on the market.

The only way out is to go into the renting business.

And if they keep allowing the debt on the homes to spiral ever higher, aren’t they going to reach a point where all of the money of the banks is tied up homes and the banks can’t afford for the prices to go either higher or lower?

The things that the homeowners may spend those draws on equity on don’t inherently help the banks. It goes to the people that give education, or provide vacations, or make big screen TVs.

Meanwhile, the homeowners that have been taking out larger and larger mortgages have less and less money to spend on other things, which can kill the economy, such as happened to the Japanese when they got two generation mortgages. Any sector that swallows up all of the population’s disposable income will ruin the economy because there won’t be money for anything else.

It is a lose-lose-lose proposition- the banks ruin the homeowners while destroying their own “equity”.

“Equity” is easy to destroy because it doesn’t, and has never, existed. All it is, is a kind of game, a human convention of allowable moves like chess or backgammon, with no real connection or existance in the real world.

If you have a Picasso, you might sell it for a hundred million dollars to the right buyer.

If I have an apple, and I say that I will give you this apple for a hundred million dollars, and you give me a hundred million dollars for it, the apple is worth a hundred million dollars.

That is “equity”.

As a species we are caught up in head games, and so much of our lives are now about understandings, institutions and conventions about things that do not literally exist.

If your dog or cat can’t see it, it is because it isn’t there.

The net beneficiaries of what might be called the equity scam are hard to trace, but with a net import economy there will be net wealth headed offshore.

How do we avoid this problem?

By turning mortgages back into mortgages.

Make it illegal for a mortgage to be issued that is not paid in full at the end of the term of the mortgage.

If a bank issues a “mortgage” of $400,000 for five years with $10,000 per year to be paid in combined interest and principal, that isn’t a mortgage in the old sense, it is a bet.

At the end of the term, you are betting that either the buyer will be able to renew or that some other institution will be able [and willing] to buy you out.

At that rate it would take a lifetime to pay off the mortgage- it doesn’t make any economic sense. It is a 2 generation mortgage by another name.

When you have so-called mortgages that are never intended to be paid in the regular course, things go off the rails.

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Republican disgrace in Wisconsin

Is there a distinction between Stalinism and forcing all the little people to work for peanuts for the betterment of corporate pharoahs?

I don’t think so.

Banks stole trillions from the American people through scams, moving the money god knows where.

How that proves that unions are demanding too much or are unaffordable escapes me.

Yet that is the essence of the Republican argument- never mind that the cause of economic collapse is trillions sent offshore through corporate shell games and the people, including the unions, have been forced to pay to prop up the remaining corporate infrastructure, probably so that it can be more completely looted.  It must be the unions fault, notwithstanding all evidence to the contrary, because that is one of the ten commandments of the Republicans’ real theology: that the root of all evil is greedy workers who want more than subsistance (=slave) wages and especially union workers.

The Republican party hasn’t stood for anything other than corporate looting, propping up corporate friendly third world dictatorships and organized crime since Eisenhower.

Ron Paul and Rand Paul really should get out and start something new before the Republican abomination becomes internationally denounced as a criminal organization.

If it can be done to Saddam Hussein and to Gaddafi, why not to the Republicans who are far worse?

A simple solution to fraudulent foreclosures

It seems that banks and robosigners are now foreclosing homes of people that did not even have mortgages with them:
This is really easy to fix.
Make statutory minimum damages of $100,000 and minimum legal costs award of $20,000 for an incorrect foreclosure application, or for an incorrect entry on the credit rating of a person due to a falsely alleged mortgage default.   Make this absolute liability with no defence if the foreclosure is in fact incorrect.
Lawyers will then take these claims on contingency and the problem will go away.
For reasons that escape me, bank officials committing frauds on behalf of banks and government officials committing frauds on behalf of governments are almost never charged criminally.  In my view their station is an aggravating, not a mitigating factor, and they should generally receive the maximum sentence.   Whether they are stealing for their own benefit or not is irrelevent.
And have not just the banks, also the lawyers working for them, as potentially eligible defendants although  on a different standard [clients lie to and mislead lawyers all the time, you can’t justify absolute liability].   Lawyers are expected to take reasonable steps to ensure that their clients are not misleading the court, and in cases like mortgages where everything should be well documented, it should be quite easy to verify whether there is an arguable claim or not.