At the request of a friend a video and some truth:

When paying is Penny is still getting Ripped off.

Picture ten houses all with $100,000, 30yr mortgages on $200,000 houses. They each pay $1000 per month into a pool of payments equaling $10,000 per month.

Now in the olden days, the bank received all these payments. If one homeowner completely defaults through bankruptcy, the bank would only receive $9,000 per month going forward and one house. Pretty Simple

Today it’s all different.

Instead of the bank owning all the future payments or the house after a default, individual investors own either a portion of the future payments or the right to a house after foreclosure.

Someone might own the right to the first two checks mailed in by homeowners each month. Another investor gets monthly payments two through five mailed in by homeowners each month.

Now who would want to own the last payment each month after just one homeowner defaults, sends jingle mail, walks away, etc.?

If we slightly change the above example, now making the house only worth $90,000, we get even closer to the current situation.

Add one more wrinkle; 20%, 30% or even higher default rates.

Keep in mind, mortgage “securities” are divided up by rights to payments not directly linked to individual mortgages or home-owners.

When you own a mortgage “security” you own the right to future payments in a present order of preference. No payments, no value. 10% decline in the underlying asset means the owners of the worst 10% get ZERO. 20%, mean that 20% of these “securities” are now worthless, zero, caput. Aere we really going to wait for that 20% to be recouped for our banks to become solvent, even if it takes ten, fifteen years?

No wonder the banks won’t let anyone look at the details of “assets”. Every poker player knows the bluff end as soon you show your cards. So why are we waiting so long to call the banks bluff?

I want to know who owns the rights to the worst 20% of monthly payments on mortgaged houses Las Vegas.

And who is going to service a mortgage with no homeowner, no occupant and no reason to not just tear it down? Like abandoned claims, we will see entire swaths of suburbia revert back to open pasture.

Certainly many mortgage “securities” are worth less then a penny. The investors, banks, corporations, pension funds who own only the right to monthly payment streams after 90% of monthly payments have been allocated to other investors hold worthless paper. Imagine this metric for mortgage securities based in cities like Detroit and Cleveland, or whole states like California and Florida.

It only gets worse. Apply the same logic to corporate borrowing and we have a problem ten times larger. This is the largest pyramid scheme since Eqypt.

What to do now?

Japan was corrupt and allowed the bank executives and shareholders to hide their mistakes for ten years while their economy limped along. Contrast that to Sweden, who subjected their banks to sunlight and quickly moved on. A starker contrast might be China, which recently executed those responsible for the tainted milk that killed many children. Now the extortionists don’t deserve death. Even though they continue to eat receive millions from the carcass of an economy they killed. Will these bankers continue to make millions of dollars exacerbating the situation they made millions creating? Not just a healthy civil judgment with suffice. Return of billions of ill-gotten gains combined with sufficient time in jail to ponder to larger social contract they violated is the least measure required to heal our Zeitgeist.

Justice is a very cathartic event for society.

After that we can easily move on, think of it as Disaster Socialism. A trillion for Healthcare will be more palatable after 2 trillion were given to just a few blocks of NYC and Charlotte, NC.

Is it really appropriate to use the same “should have known” language for people with negative equity or too high a mortgage payment that is has been used for a smoker with emphysema?

If so, should we also blame victims of medical malpractice for failing to understand their own medical procedures?

Of course we can blame any lay person for mis-applied trust, but what is the end result?

The regulatory environment that arose during the Great Depression (Securities Exchange Act of 1934, Securities Act of 1933,) came about to restore trust in stocks and the stock market.  It’s a testament to their effectiveness that it took over seventy years for Wall Street to subvert them.  There will always be people willing to break the law, the problem arises when you can commit fraud without technically breaking the law; as evidenced by stock brokers in the 1920’s and mortgage brokers in this decade.

Hopefully, we will have the same political will, as in the 1930’s, to close this loophole without the financial upheaval of yesteryear.

Web Blog Calculated Risk has been breaking great stories on the housing market for quite some time.   My favorites posts are the ingenious ways that savvy deadbeat borrowers are putting the screws to the lenders. Disregarding the poor schmo who naively bought a bigger house then he/she should have, there are great anecdotes about the lender getting the short-end.

A) Jingle Mail is just one hurdle for any mortgage lender. The technical name is Ruthless Foreclosure; it’s when a homeowner with large negative equity simple mails their house key to the lender and walks away. A neat wrinkle involves a borrower who first buys a second house, on the new cheap, prior to destroying their credit score for a few years by walking away.

B) Taxes and mowing the lawn. What does a lender do with a foreclosed property’s taxes? Imagine you loaned someone $600,000 only to foreclose on a property now worth $500,000 with another $5000 taxes due. Needless to say you, as the lender, can’t afford to wait for the market to rebound…paying all the property taxes and mowing the lawn while you hold on.

C) And now we hear of this from Florida via The Big Picture: Foreclosure-Proof Homeowners.  In brief, the court system is so backed up in Dade and Broward counties that deadbeat “owners” of $2 million plus homes are living rent/mortgage free; some for as long as two years. Not only is the court system backed up 8-10 months but the mortgage servicing merry-go-round of the last few years has made it even worse for lenders.  Missing paper, mortgage bundling, and great homeowner attorneys makes these cases ripe for long proceedings.    Of course, this only favors the well healed deadbeat. Keep in mind that most state laws prevent a lender from getting any more then the original collateral.

No wonder some cities are buying the foreclosed properties themselves…and razing them.

I can’t end this post without a story of a true victim.   I heard this sad story from the man’s mother:

He had been renting his home for over five years in 2007 when his landlord told him he was selling the property.   He gave my friend’s son and her two grandaughters two options: move him and his two daughters out in 30 days or buy the house.   Sadly, he chose the latter with both a standard mortgage and the so called “piggy-back” at the height of the market.  Of course the landlord new it was overpriced, that’s why he was selling.   Now, like countless other, this hard working father has negative equity and can’t refinance his ARM like his broker promised at the outset of the purchase.

Luckily, or unluckily, he is in a union and can get all the OT he wants and now needs to keep up with his new scalp rate.   I urged his mother to tell him about the HOPE-NOW program last week when I heard his story.

Well he had already called the number a month ago only to be told that he can afford to pay so no help for him. It seems the hope and help only apply if your already drowning in debt not when you fall off are pushed off the boat and can still tread water.