Who Really Owns Your Mortage?

A bank. But which bank?  Recently, every week has to have it's own crisis. And this week is no different. However, this one thirteen years in the making, may take years to sort out and settle. Trillions of dollars in home loans and ownership rights are now at risk.

In the rush to relax home lending standards years ago and to push our country toward the American Dream that "everyone must own a home", a new infection was introduced that would make Big Bank pooled mortgages act like the living dead, and Wall Streeters look like Zombies. "Mr. Home Loan, meet MERS". The Mortgage Electronic Registry System (MERS) was created to electronically register, transfer and track home mortgages.  Big Banks and mortgage sweatshops made, packaged, and sold mortgages by the thousands weekly. Countless investors from Wall Street hedge funds to insurance companies to foreign governments, hot cash in hand and looking for big profits gobbled them up. Pass the cash, and here is your list of home loan serial numbers you now own. That's it. No paper, no documents changed hands.

MERS went about its merry way, adding electronic tracking to this home and that one, marveling at its efficiency. There was only one problem; one flaw. MERS is an electronic registry not a real paper filing cabinet full of countless real loan papers. It was never an intention of the MERS creators to file and handle the original loan documents.  No one thought anyone would ever ask about the real paper. Enter one Borrower in bankruptcy court, asking one question: "Mr. Big Bank mortgage investor, prove that you own my home loan by furnishing my original loan documents to the court." Big Banks and their thousands of investors cannot. Community banks who have always kept their mortgages, at least their servicing rights, can. Community folks loaning money in their community. Real people handle the registry, not MERS. Now, where did all those Big Bank original mortgage documents go?

You see, the law as I understand it is you have to prove the chain of title, no matter how many times a loan is re-sold. If you can't prove ownership of title or of the loan, then you don't have real legal standing to foreclose. Wow! 4 million people just got a breather. Add another 6 months to a year to the ride. Will all those people get to keep their houses with no more payments? Of course not. It's a systemic delay that will slow our recovery in housing and the recovery of our overall economy. Probably, by two more years.

There are 62 million home loans with a MERS tracking number assigned to each. It's like a social security number for a home loan. Some say, if your home was securitized by a big bank or mortgage company into one of the thousands of loan pools and sold, you may not get full clear, clean title until this is all settled. It may take years. People buying discounted and foreclosed homes may have the same risk of someone knocking at their door some day and saying, "I have an active loan on this property...".

Here's the bottom line. If you don't pay, you will eventually lose your home. Putting off the pain until another day doesn't change that.  I  personally have talked to people that have played the system and not made a house payment for 18 months on a Big Bank mortgage. 

     "What's your outcome, long term?", I ask. The answer is always the same.
     "I am just waiting for them to come throw me out. I know it's inevitable, but its a numbers game for them".  

Now, courtesy of MERS, the numbers just reset from 4 million homes in various stages of foreclosure back to zero.  The system known as our economy shudders once again.

D

A House That is Worth Less Is Still A Wonderful Place to Live

I just refinanced my home. Guess what? It's worth less than I paid for it. So, I immediately have all the same thoughts that you do about your house and its value. First, OMG! What do I do? Sell, upgrade, remodel, ask for another appraisal? Then I think the obvious. I have a wonderful home in a nice neighborhood, and I enjoy the roof over my head. I can paint it the color I want. I decide when the grass is cut and how to shape my River Birch trees in the front yard. It's mine.

What is most striking in my thought process is the one thought that didn't cross my mind, and that's walk away.  I have a contract with Freddie Mac (the Government). It says I make my payments and they let me own a home, and they let me stay there without interference.  If I sell my home and make money on the sale Freddie doesn't get a cut of my profit. It's mine. Likewise, if I lose I can't send them the loss or blame them for my choice of buying in the first place. That's mine too. They held up their end of the deal and I hold up mine. 

It seems that this contract of mortgage, created in the dawn of finance, is up for re-negotiation. And, as the national home price chart below indicates Missouri and the mid-West isn't that bad, and we could be a lot worse off. This is a year-end 2009 chart, but I think the worst damage to home prices is behind us, and while we may slide a bit more, I don't feel it will be significant.

So, if we decide to break contracts solely when it favors our interests, what would happen if others did the same. Like when you almost have that home paid for and out of nowhere Freddie comes knocking; "hey this is worth a lot more than you paid, cut us in for half, or we are taking your home...". Or, you're in the ER with a little one needing stitches, and the hospital decides to break their contract with your insurance provider just because it benefits them? The beginning of a moral unraveling of contracts in our modern society would see no ending. 

No one, including me, likes to see their home value go down. However, a contract is a basic building block for trade and the fulfillment of a contract is the foundation for business as we know it. There is one other possibility to consider when thinking of all the options. With interest rates historically low, consider refinancing your home with a bank with low closing costs. Take the opportunity to shave years off the life of your loan. Quite possibly, the decline of your homes value due to this crisis may be offset by a much, much lower interest rate and it may be more of a positive than you think.  An opportunity of a lifetime to pay off your home quicker, due to the same crisis. In the mean time, your home is your castle, and no crisis can change that.

D

Quantitative Easing (QE): Congratulations! You're Pre-Approved for $1 Trillion in New Spending

As a kid, when it was time to go to the doctor it always meant a shot. I'm not real fond of needles. In fact I down right despise them. Of course, that made the "you're gonna feel a little prick" even worse. But, afterwards Mom would always say "now lets go get an ice cream cone" and I would feel much better. Nothing like a quick, short-lived sugar high to make you feel better about things.


Quantitative Easing (QE) in reality isn't any different. The question is do we need a shot in the arm, and will the vaccine work?  We need something to spur an economic recovery. But, is QE the vaccine? Taking a flu shot to help with a cancerous tumor is not the answer.

Oct. 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high. “There would appear -- all else being equal -- to be a case for further action,”  Bernanke...(is) considering ways (to) stimulate the economy as unemployment holds near 10%... After lowering interest rates almost to zero and purchasing $1.7 trillion of securities, policy makers are discussing... purchasing Treasuries...

Purchase additional Treasuries with what? Newly printed money. A pattern of borrowing and spending from future generations is not the answer. I'm not sure really what is. Consumers are trying to pay down debt and change their spending habits, while the government does not.  Consumer spending makes up 70% of the U.S. GDP (economy). And until consumers feel safe to spend, there will be no recovery. The graphs below show just how much new money has been printed and injected into the system: 

To simply explain Quantitative Easing (QE), consider the following two perspectives:


1) QE is a way to spur the economy into a re-start. Print and issue new dollars, buying with them newly issued or existing government securities or treasuries, and add them to the FED's balance sheet. This injects the new money into the economy, and the FED effectively monetizes and capitalizes our debt. This should cause prices to rise (inflation) because there are more dollars floating around and people will spend more of them to buy hard goods, food and energy, driving prices up. Money is cheap, rates are low. Banks lend cheaper money, and businesses hire and give raises with the cheaper money. People have more money to spend. People buy washing machines and flat screens. At least that's the theory.  Ahh, the feeling of that sugar high. But, in 30 days those flat screens get more expensive because they were built in China, and your spending U.S. dollars...


I can tell you that when the supply of something is high (dollars), the price of each falls (devaluation), and that is exactly what is happening to the dollar against the world currencies. In Europe, they too, have significantly devalued the Euro the same way, but that's a whole different blog. Consider...

"Paper money eventually returns to its intrinsic value ZERO" - Voltaire 1729

2) QE is a desperate attempt to do something when you have run out of ideas that make sense but you feel you have to do something. It's short term bad choices without any long term regard for the consequences. Recently, dissension is evident at the table of the Federal Reserve Board of Governors. Two members are openly dissenting and speaking about that dissension publicly. You see, there is no real proof that this does anything for the economy. It just devalues our dollar against other world currencies. Rothbard says the devaluation of our currency has been going on since World War I...

       The Monetary Breakdown of the West by Murray N. Rothbard

                             http://www.lewrockwell.com/rothbard/rothbard240.html

"...the prognosis for the dollar and for the international monetary system is grim indeed... until we return to the classical gold standard at a realistic gold price... And fueling disintegration will be the continued inflation of the supply of dollars and hence of American prices which show no sign of abating. The prospect of...runaway inflation at home...and economic warfare abroad. This prognosis can only be changed by a drastic alteration of the American and world monetary system: by the return to a free market commodity money such as gold, and by removing government totally from the monetary scene."

Both theories can stimulate a lot of happy hour debate. Now just how much flu shot dosage will cure cancer? I  mean a flu shot is better than nothing right? So lets keep giving incremental doses until we see some change...I fear wrong. Throughout the centuries it has been proven time and again that you cannot control the markets indefinitely. It's just too big. Over $1 Trillion in stimulus was but a drop in the ocean of the world economy. Did it create jobs? Yes, for a few months. Some, maybe a year. Ahh, that sugar high. Then we are left with no jobs, and $1 Trillion more in debt. So, let's try it again and see if it works any better. Really?

I'm not here to tell you how to fix this.  We all know a lot of smart people have tried. One very old theory is to do nothing. The market and economy will take care of itself, and will seek its own level.  Some businesses need to fail, some banks need to fail, and some people just need to lose their homes. Natural Selection. It's not pleasant, but it is survival of the the fittest. How would the world be today, if we had bailed out the dinosaurs? I can see the nightly news headlines now: Dinosaur breaks through playground fence, eats 6... Some things are better off left to nature. Wouldn't you agree?

In the mean time I wait.  Like the rest of the consumers in the U.S., I am watching my spending, paying down debt, and waiting for the appearance of the catalyst that will spur an economic recovery.  I wait for the election cycle to bring about hope & change just like everyone else is. There is no doubt that we need change. We need the government to apply our basic principals for checkbook/debit card management. We've mortgaged our kid's futures. Now we are beginning to mortgage our grandkid's futures as well.  We may have actually already done much more than that. Like so many the last few years who took out a loan that they could never repay, the good 'ole USA may have done the same. With the rest of the consumers in the U.S., I am watching my spending, paying down debt, and waiting for the appearance of the catalyst that will spur an economic recovery.

D

It All Starts With a Sunrise

I thought a lot about my first blog post. Either way good or bad, I knew it would be historic. I've read extensively. I've been following many other blogs. My opinions are formed. I've tried to determine where the line is between what is acceptable and what is not. I've found that if it's your blog say what you want. Just be prepared to defend your facts, and your ego.

What to say? Be informative? Original? Polarizing? No, just say whats on my mind. What do I think of at 3 a.m.? How would I fix things? Who would I ask for consult? How could I trust my friends to help when I would wield such power? Could I do any better fixing the mess we are in? Hell, could I do any worse? Who would be just using me to get what they want? They all would.

So again now I am alone. Utterly alone. With no one to help me assemble this first historic foray.

It was easier to get married. Get divorced. Buy an house. Or a bank. Hire good people. Let them go. Make a payroll, or decide not to.  Come to the brink only to be yanked back as pebbles tumble over the edge. Yes, I have done them all. It was easier to do all those things then bare my soul to your opinion.

My hope would be that someone way smarter than me doesn't read my blog, and refute each and every position. Destroy each and every fact with such precision only a laser guided bomb could appreciate it.

What do you want in a blog? Someone to tackle you? Someone you can tackle easily? Some blogger that is an easy straight guy? You tell me.  I make an easy target. I love the challenge. But I never lose. At least in my mind. The worst feeling is when I am in the middle of a great debate, and realize that I am wrong.

My hope is within my debate with you that someone, somewhere in a position to change things might read our debate, and a light would break through the darkness, and a real discovery would be made. A beginning to a real recovery of the mess we are in could begin.

So where do I start? I have so many points. How about a few bullet points to set the tone:

• Our economy is worse now than in the Great Depression.
• Our Dollar is closer now to going to zero than at any time since the Continental Dollar went to zero and George Washington couldn't buy a chicken to feed the Continental Army
• Quantitative Easing (QE2) is buying your way out of debt with a debt. Its like paying off your credit cards with a new credit card and saying your all better.
• That Obama has moved us closer to Socialism in 2 years than Communism did in 95 years.
• That when you print money with no intrinsic underlying value, smart people will figure it out and quit accepting them.
• That when you tell China, whose economy is 30x larger than ours and holds our mortgage, to do what we tell them; don't be surprised when they say get lost. And then you come back home acting like you were right and China has it all wrong.
• That history repeats itself. And if we don't learn from the Romans, we are destined to follow them.
• That we are in year 2 of a lost decade.
• That your house may never again be worth what you paid for it.
• That social security is full of nothing but IOU's and I'm not counting on it. I plan to work to age 75, not because I want to, but because I will need to.
• That the stock market is so overvalued, a sugar high wouldn't be this good at a candy making party.
• That September and October always tell us when we are headed in the wrong direction.
• It will be a socks and underwear Christmas, unless leather jackets are the same price.

There. I feel better. I hope someone has something to say about one of those points. Who knows, you may go down in history as the first respondent to prove me wrong. We'll talk soon...

D