Posted on 09/26/2010 8:59:04 AM PDT by blam
What makes you think that they are?
Selective "facts" are wonderful, aren't they?
That's right up there with "the price of gold has tripled in the last ten years," and "Public employees haven't had a raise in California since the year 2000 (in 1999 all the California parasites had a 34+% raise; and it accumulates.)
Between 2005 and 2008 was the feeding frenzy of greed in the "housing will make you rich" market.
As a Board member of a Homeowners Association I saw first hand the results. Many people bought several homes during that period, because they bought into the "housing is a bulletproof investment with huge returns" pipedream. The year 2007 seemed the worst for ignorant, unaware, idiot homebuyers.
One thing I know for a fact. People who have been in their homes for 15 years or more are not part of the proble, They may not be as rich as some who bailed at the right time, but they ad surely not a part of the problem. And, for most, they have mortgages that are not likely to upset their entire lives if they lose employment.
Stop making things up. Again, I never said that. I said, "The value of one's home is an important part of one's financial situation."
Hope you can see the difference. My point has nothing to do with "unlimited increase" in home values.
So let's look at the basics of Contract Law and see if we can find a way out of the box, because I think we can. It may require some courage, but it's not impossible.
Contract Law is in the general sense very simple. You have offer, acceptance, and an act in furtherance of performance. That is, someone must offer something, the other party must accept, and then one of the parties has to do something toward what you just agreed to. That's the basics.
But along the way lawmakers realized that there were some problems with this. Chief among them is the fact that you and I could agree verbally to something that might take five years to complete. Humans have notoriously bad memories, especially when it's in their best interest to "forget" little things, so one of the "additions" that got tacked on is a thing called The Statute of Frauds.
That Statute doesn't say "this is fraudulent", as the name implies. Rather, it says that in order for certain contracts to be valid, they have to be reduced to writing and bear an actual signature.
What are those contracts?
In most States they are any agreement that:
* Contemplates performance over a period of more than one year. That is, if you wish to have a contract to clean your pool for six months, you can do that verbally. But if it's for more than one year it has to be in writing, or it's unenforceable.
* Deals with the sale or a security interest on real estate. That is, you can't have a binding agreement to sell your house verbally. It has to be reduced to writing (a cocktail napkin counts though!) and carry signatures of both parties.
There are a few other sorts of contracts that fall under this Statute and it varies a bit from State to State, since this is a State Law thing. But for the most part you can expect that if you want to do something related to real estate (or the security interest associated with real estate) or contract to do a thing over more than a year's time, it has to be reduced to writing and carry an original wet signature or it's not enforceable.
So we have a way out of the box here.
See, the typical way these transactions worked was something like this:
* Joe "buys" a house. He executes a deed which is recorded and names him as the owner. He also executes a mortgage, which gives a security interest in the deed to the bank that funds the loan. The seller conveys the title (with a written document) and there's a discharge of any other security interest that may exist (also with a written document bearing a signature.) So far, so good. (Incidentally, I'm aware that this is state-specific.... and is very different in some states, especially non-judicial foreclosure states!)
* Joe goes home. But the bank bundles up and "sells" that paper to a MBS trust in a securitization. Is there a paper agreement bearing an actual signature for each of these loans? Or did this all go into "MERS" and then was "traded and tracked" electronically? Note that there is no "or substitute as someone wants" in the law in virtually all states.
* Now it gets even murkier. Some of these notes were endorsed "in blank". That's not allowed in some states either - they do not allow trusts to hold bearer paper of any sort. On a Federal level doing so effectively creates a bearer bond, which runs afoul of TEFRA, a 1980s-era law signed by Ronald Reagan to discourage drug dealer use of these things as a way around the lack of "large" currency denominations. Bearer Bonds were not made explicitly illegal, but TEFRA requires that on creation of any bearer instrument 1% of the face value of the instrument for each year of duration is due to the IRS as a tax! Needless to say that hasn't been happening....
If there's a defect - especially a problem under The Statute of Frauds - these problems cannot be fixed.
The aggrieved party (that's the MBS holder who got rooked into buying paper that was allegedly "Prime" when it really wasn't) should have every legal right to void the agreement.
Well, what happens if he does?
No, the homeowner doesn't (necessarily) get a free house.
But he does have a deed with a security interest. The bank that originally funded the loan however, was paid in full. They cannot enforce a security interest they no longer have.
Or do they have it?
Well, they sure do if the MBS holder sticks it back on them and demands the full face value of the paper! And it would appear that they have every right to do so, as a contract that does not comply with the legal requirements to be a contract is no contract at all!
That is, unwind the transactions from the first defect forward. This will typically force the paper back onto the bank's balance sheets, and they will have to pay face value to the MBS trust, which (once that has happened) has nothing left and thus dissolves, having returned the funds to the buyers (since the instrument they bought no longer exists and never did as a matter of contract, they're entitled to have their money refunded for that which never legally happened.)
The banks now have the loans and the right to foreclose, but they also have all the losses that come with it. That is, the hot potato that they tried to drop (and in many cases DID drop) on various institutional and other buyers lands right back in their lap.
If this kills them, so be it.
I'm well-aware that this suggestion will raise howls of protest.
It is also the only just way to deal with it.
Put back the paper that violates The Statute of Frauds, and at the same time put back paper where there was a material false statement made with regards to reps and warranties.
I'm willing to bet that's most of the non-agency mortgages and perhaps a good percentage of the agency ones as well.
Let the losses fall on those who made the loans, knowingly selling paper into trusts without compliance with the reps and warranties, or, in some cases, who effected a contractual sale without meeting the requirements of a contract in the first place.
If state law requires an unbroken chain of assignments we still have one at that point. The homeowner doesn't wind up with a "free house", but the bank that originally funded the loan (whether directly or via a warehouse line they were providing the money for) gets stuck with whatever loss might accrue as a consequence of the foreclosure, instead of trying to foist it off on the taxpayer.
And that, my friends, is exactly as it should be!
This isn’t a new proposal, but it has been a good proposal. I don’t remember where I first saw this proposal (ie, of splitting the mortgages in two, and the banks taking a write-down on the “solid” part of the mortgage), but it was late last year.
Here’s why it won’t ever see the light of day:
It requires banks to write down their current assets.
Any solution that requires bankers to admit that:
1. Their loan portfolio (loans are “assets” to bankers) is impaired to a point where it changes their capital ratios,
2. That the loans on their books are far less marketable than the fairy-tale accounting their now using would indicate...
will never see the light of day.
Extend and pretend is what the bankers (and the Fed) want right now.
Not doing so would cause what kind of problems?
An admission that the banks are busted?
As they say, victory has a thousand fathers, but defeat is an orphan. The finger pointing over the mortgage meltdown that goes on in online thread after online thread like this one is the perfect example of that truism.
As far as the article goes, it was MIT-type guys thinking they can come up with a better system than the free market’s invisible hand that got us into this mess in the first place (along with a healthy dose of social engineering and greed on ALL sides of the real estate transaction).
There is no MIT-contrived way to put the genie back in the bottle. The camel’s back is broken. The bubble has burst and it’s a long way down back to earth. The pain must come.
Anyway, fair and easy usually translates into “the guy who does the right thing becomes the biggest loser” and that leads to a complete and total breakdown of a society. Never good.
Market manipulation always distorts prices and leads to a bubble... but this time the manipulation was so far-reaching that it lead to a catastrophe. There is not one single cause to point to. The bubble was so big exactly because there were SO many factors that helped to create this perfect storm.
How big? We increased our residential mortgage debt from $2.6 trillion in 1990 to $5.1 trillion in 2000.
Then from $5.1 trillion in 2000 to $11 trillion in 2007.
Again, we increased our national residential mortgage debt BY 6 trillion dollars during that time.
It took us many decades to get to 5.1 trillion. It took us only 7 years to more than double that number to $11 trillion!
The question is, how much did we overspend? 2 trillion? 3 trillion? More?? What if houses were already overpriced at $5.1 trillion in 2000?!? The numbers are mind-boggling.
The reality that people do not seem to grasp yet is that ANY loan done during that time frame was a bad loan because the value of the underlying asset was grossly distorted/inflated.
Another harsh reality is that millions of the jobs that were created during that time were temporary, because they existed only as long as the real estate bubble existed.
Ironically, we need jobs now more than ever since jobs (preferably non-government, export-creating jobs) are the only thing that can save us, if anything can.
Unfortunately, due to the incredibly hostile anti-business environment we have created over the last 30 years with a success-punishing complex tax code, ridiculous regulations, millions of frivolous lawsuits and our failed public school system pumping out dumbed-down workers, it is going to be anything but easy to create jobs. The anti-business attitude in Washington and states like CA has got to stop!
One last note. On a smaller scale, same thing that happened in mortgage loans is happening right now with student loans and college tuition. “Fair and easy” student loan money is driving the price of a college degree up and the value down... and tenured six-figure-salary college professors and million-dollar-salary university presidents are laughing all the way the bank.
According to most people on this thread, anyone who pays for a college degree right now is “dumb”, because a college degree is just as over-priced as a McMansion was in 2006.
We now owe more in student loan debt than we do in credit card debt. And with Obama nationalizing the student loan industry in the Obamacare bill, you can bet that “fair and easy” student loan money is just getting started.
Lesson learned: we never learn.
and it wasn't like nobody understood the consequences..
http://www.youtube.com/watch?v=_MGT_cSi7Rs
yup.
That's the difference between sophistry and reality.
Without the expectation of "unlimited" increase in home value, not so many idiots would have been created.
It was not only clearly implicit between 2000 and 2007, the myriad TV, newspapers and magazine ads peppered everyone with the siren song, to accompany the radio ads inviting us all to get rich in real estate.
Those of us who were not on Mars at the time, remember it all clearly.
A distinction without a difference.
lol...Good one....have never seen that one before
BFLR
The reality that people do not seem to grasp yet is that ANY loan done during that time frame was a bad loan because the value of the underlying asset was grossly distorted/inflated.
Another harsh reality is that millions of the jobs that were created during that time were temporary, because they existed only as long as the real estate bubble existed.
These two points are MAJOR. They must be repeated again and again until they start to sink in to the zeitgeist.
And your first point answers very well the unfounded finger-pointing of those who denounce all this as the province of dummies, greedmeisters and charlatans. The fact is unless you happened not to buy a home in the last 15 years -- and that is something that has to do with more than intelligence, greed or scruples -- you were exposed through no fault of your own, and perhaps despite your best efforts, to the dynamics of a bubble the likes of which will truly go down in history.
As for jobs, there is a fundamental restructuring going on in the economy. The jobs spawned by the housing market are not coming back because the housing market, as it was over the last decade, is not coming back.
Too many analysts seem to think there is an intrisic demand for purchasing houses, that people need to do this at some level the same way they need to buy food. WRONG. NO one MUST buy a home. People do have a need for shelter, but that in no way translate to a need to buy a home.
Without the facade of the go-go housing market obscuring our view, it is now clear that the economy truly is global. American corporations that are large enough to do so will migrate to growth -- that is, to anywhere in the world where they can sell their stuff or make it cheaper. Therefore, the competition for all of these jobs is GLOBAL. That is something quite different than has been dealt with in the past.
The only jobs in which people are not competing for with workers from all over the world are those jobs which must be done locally, for example, in the service industry. The food wrappers may be manufactured in Hong Kong, but someone in your town has to flip the burger for sale.
This makes small business (those that cannot or do not need to migrate to growth around the globe) even more crucial -- just at a time when our President and his party of Rats are doing everything within their power to crush small business.
...as many as 23% of US mortgages are "underwater" -- the value of the home collateralising the mortgage has fallen below the loan's balance... could be restructured into two parts: a) a standard new mortgage against the current (reduced) value of the home, and then b) a claim against some fraction of any capital gains (above that reduced value) when the home is sold.Rather than bail out the banks directly (which was merely a gambit to bring them under direct federal control), the Demwits could have ensured themselves their long-sought "durable majority" (single party state) simply by paying off up to some set amount all mortgages which are are underwater, in exchange for the described refi (paying off the part of the loan which couldn't be recovered in a foreclosure) and lowered house payments. The money would have helped the underwater banks as well, which is the problem they alleged themselves to be concerned about. The banks would then have had less coming in, but it would have been more reliable overall; and the cash rec'd would have been written out as new loans.
Perfectly said!
Unfortunately the real province of dummies, greedmeisters and charlatans, a.k.a. Washington DC, will never level with the American people honestly and tell them the truth.
Of course, that assumes that the people in Washington are smart enough to have figured out the truth themselves, which is highly doubtful. Even if they did realize what you stated so clearly, they would never have the dignity or the guts to lead America in the right direction. That would take character and strength. They have neither.
The answer is that we need to produce real wealth. What made America so wealthy in the first place was making things and selling them to people all over the world. We have to find a way to become that country again. We also need to drastically cut our dependency on foreign oil.
In order to do so, we need to make radical changes to our abominable tax code, cut in half our burdensome laws and regulations and hit the “reset” button on our deplorable public school system (just to name the top 3 that come to mind).
That would take a level/combination of national determination, grit and sacrifice that we have not been called upon to exhibit in my lifetime.
No, the critters in Washington will continue to offer program after foolish program that expands their power while making the problems even worse. (Not to mention the multi-thousand page laws they have just passed that have probably already made this conversation a moot point and sealed our fate.)
I shudder to think how much worse it will get, but I’m afraid we are at the tip of the iceberg. Wait until they actually pass Cap and Trade! True, they will hit a roadblock in November, but even if they do not pass it on the floor of Congress, they have already found a way to sneak it in the back door through the EPA. THAT one is the mother-of-all economy killers!
The reality is that unless we find a way to take control back from Washington and get America back on the path that we diverged from long ago of fiscal responsibility, self-reliance and individual liberty, we are, as many like to say on FR, doomed.
The task seems practically impossible.
Do you think this is what it felt like to weigh the decision to finally take on England or not way back when?
Thank you for a thoughtful conversation.
Ummm, so you know the .001% of the population of home owners whose homes have not lost value... what were they, dog houses?
Guess you’re looking for a bail out because you got in over your head.
Do some research.. you’ll learn a lot.
If the stock market falls, do you have a plan to make up for people's losses?
Them that are really ignorant about how the real world works become White House economic advisers.
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