When a Penny is Overpayment?

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.


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