The Mortgage Deal – Brilliant

There are many reports on the mortgage deal.  Here is a brief version: 'Holdout States Lured Back to Mortgage Deal'.

Dick Bove, a respectable bank analyst, was visibly angry about the moral issues when he appeared on CNBC shortly after the agreement was announced.  Rick Santelli, the lone person on CNBC with a sense of reason, was also incensed.

What is the mortgage deal?

It is $26-40 billion that the banks will have to set aside for miscellaneous give-aways to borrowers who decided not to make their mortgage payments.

What is the rationale?

Banks supposedly defrauded borrowers because during the foreclosure process, they signed affidavits without proper documentation. In simpler terms, they did not cross the 't's and failed to dot the 'i's.

Why is this a big deal?

Because of the robo signing scandal, borrowers that may be years behind with their payments can at present not be foreclosed upon. This results not only in a non-performing asset for the banks, it is an asset that continues to deteriorate without them being able to put a stop to the process. Since the banks are indeed guilty of sloppy foreclosure procedures, they need to somehow put this issue behind them so they can foreclose and stop the bleeding.

What is the most important element of this settlement?

We will find out the details later, but I have to assume that it must include some safe harbor rule under which the banks can resume foreclosure proceedings. With this settlement, the banks found the safe harbor at no cost.

Why is this mortgage deal brilliant?

Attorney generals vs. big bad banks, that is not even a fair fight. The big bad banks have now put to rest a big mistake that has haunted them for years. Here is how it works:

Borrower A purchased a house for $500,000. Big Bad Bank (BBB)  financed the purchase with no down payment from Borrower A.  The house is now worth $350,000. Borrower A has not made a mortgage payment for two years. The BBB is sitting on a loss of $150,000 plus lost of interest plus foreclosure cost plus disposition expenses yet to come.


Prior to the settlement, this scenario was simply going to continue, with Borrower A not only staying at the house for free, but the bank's equity continuing to be eroded by having to pick up insurance and property taxes, plus 'owning' the physical deterioration of the underlying asset. At this point, the BBB should already have written down the loan, at least to the $350,000 level using a current appraisal.


With the settlement, the attorney generals made headlines that incensed Bove and Santelli and most taxpayers. The banks are the ones cheering and Borrower A should start looking for housing alternatives.


Step 1 – in this example, I am going to be generous.  The BBB is going to reduce the principal of Borrower A's mortgage by $50,000, from $500,000 to $450,000.  There is no cash given to Borrower A, but he now owes less. Furthermore, the monthly payment is now also reduced. I am going to be super generous and also throw in a new interest rate from whatever it was at thze time the loan was made to the current prevailing conforming loan rate of around 4%. Bottom line, the loan balance has been reduced by $50,000 and the monthly payment reduced by many hundreds of dollars for poor Borrower A.


Step 2 – while most would consider that a fantastic bargain for Borrower A, he is still faced with an over-encumbered property. Should he accept the deal and start making payments? Most would realize by now that Borrower A is still better off by not paying, by dragging the foreclosure process out for as long as is possible, while saving up to re-enter the market in three years (the penalty period for having a foreclosure on one's credit report).


Step 3 – the BBB is now placed in a no lose situation. Firstly, the $50,000 principal reduction has already been written down long ago. It is now just a paper entry with no effect to the bottom line. It is free money. Secondly, if Borrower A starts to make payments on the $450,000 loan, say at 4%, the BBB is in essense receiving interest on $450,000 with an asset that had previously been written down to $350,000 or less. Under this scenario, the BBB actually can book a gain. Finally, if Borrower A decides to continue defaulting, the BBB can now foreclose and put an end to the robo signing nightmare. A win-win scenario for the bank.


How is this going to impact the real estate market?


Foreclosures are finally going to become REOs. It will take years for the market to absorb this inventory.


How is this going to impact the economy?


There are over five million households with no housing cost, simply by dint of  not paying their mortgage. This is going to come to an end. These subsidized households are either going to accept the settlement and start making payments, or will soon be foreclosed upon and evicted. They would have to start paying rent somewhere. One wonders what that is going to do to consumer spending.


Moral of the story: the big bad banks always win.

 

Addendum:

After writing this post, I was reminded by a friend that the mortgage debt relief act is due to expire this year.

 

See:

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation


I must therefore assume that any principal reduction is going to taxable unless they change the law. It is a mess.


 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

2 Responses to “The Mortgage Deal – Brilliant”

  • davidh:

    As I understand it, the consent decree forgives past perjuries (robosigning), it does not do any thing to authorize new perjuries. There is still the obstacle to foreclosures because perjury can still be prosecuted as a felony.

    The path you explain, that gets around the need for manufacturing chain of title, is to do a loan modification or perhaps a refi that would establish a new loan. That assumes the homeowner is dumb enough to do a refi to a $450k loan on a house with $350k value.

    All the homeowner that is that far underwater is to sit tight, and make no mortgage payments. The lender still can not foreclose because the chain of title is messed up. Is an involuntary refi possible? That would be truly a miracle.

  • Andyc:

    Ramsey

    The most important thing to come out of this deal is that they are off the hook as far as charges of fraud are concerned and that the money to pay this so called settlement will come from the taxpayers

    http://www.zerohedge.com/news/housing-settlement-be-taxpayer-funded-confirming-big-five-banks-are-beyond-law

    “In simpler terms, they did not cross the ‘t’s and failed to dot the ‘i’s.”

    Are you kidding?

    I suppose someone could write an article or an academic paper explaining how we are “better off” economically NOT prosecuting these scoundrels as that would cost us even MORE money seeing as we would all collectively have to pay their legal fees, any and all fines and judgements against them and one would assume serve their jail sentences for them but I’m not up to write such a tale.

    Knock yourself out if your up to it.

    http://blog.chron.com/lorensteffy/2011/12/guess-whos-paying-to-defend-fannie-and-freddie-execs/

    They did a lot more than not cross I’s and dot T’s

    : )

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • TMS-2 fast versionA Date Which Will Live in Infamy
      President Nixon’s Decision to Abandon the Gold Standard Franklin Delano Roosevelt called the Japanese “surprise” attack on the U.S. occupied territory of Hawaii and its naval base Pearl Harbor, “A Date Which Will Live in Infamy.”  Similar words should be used for President Nixon’s draconian decision 45 years ago this month that removed America from the last vestiges of the gold standard.   Nixon points out where numerous evil speculators were suspected to be...
  • Perfect-InvestmentInsanity, Oddities and Dark Clouds in Credit-Land
      Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more.   The perfect investment for modern times: interest-free risk! Illuustration by Howard...
  • Factories, new vs oldUS Economy – Something is not Right
      Another Strong Payrolls Report – is it Meaningful? This morning the punters in the casino were cheered up by yet another strong payrolls report, the second in a row. Leaving aside the fact that it will be revised out of all recognition when all is said and done, does it actually mean the economy is strong?   Quo vadis, economy? Image credit: Paul Raphaelson   As we usually point out at this juncture: apart from the problem that US labor force participation has...
  • CorporateMediacontrolTrump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
      Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system.   This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
  • mania1The Great Stock Market Swindle
      Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success.  Obviously, the first to tap into an unmet consumer demand can unlock massive profits.  But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven.   Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
  • Mark Carney starts work as Bank of England governor in Dave Simonds cartoonBank of England QE and the Imaginary “Brexit Shock”
      Mark Carney, Wrecking Ball For reasons we cannot even begin to fathom, Mark Carney is considered a “superstar” among central bankers. Presumably this was one of the reasons why the British government helped him to execute a well-timed exit from the Bank of Canada by hiring him to head the Bank of England (well-timed because he disappeared from Canada with its bubble economy seemingly still intact, leaving his successor to take the blame).   This is how Mark Carney is seen by...
  • old friendsAn Old Friend Returns
      A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here.   Hello, old friend. Professor X and Magneto staring each other down in the plastic...
  • web-puzzled-man-scratching-head-retro-everett-collection-shutterstock_91956314News from TINA Land
      Distortions and Crazy Ideas We have come across a few articles recently that discuss some of the strategies investors are using or contemplating to use as a result of the market distortions caused by current central bank policies. Readers have no doubt noticed that numerous inter-market correlations seem to have been suspended lately, and that many things are happening that superficially seem to make little sense (e.g. falling junk bond yields while defaults are surging; the yen rising...
  • tortoiseThe Fabian Society and the Gradual Rise of Statist Socialism
      The “Third Way”   “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw   An emblem of the Fabian Society: a wolf in sheep's clothing   The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
  • storming the storeRetail Snails
      Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example.   Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg   We'll make an...
  • The CongressThe Fed’s “Waterloo” Moment
      Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here).   He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
  • Lighthouse in Storm --- Image by © John Lund/CorbisSilver is in a Different World
      The Lighthouse Problem Measured in gold, the price of the dollar hardly budged this week. It fell less than one tenth of a milligram, from 23.29 to 23.20mg. However, in silver terms, it’s a different story. The dollar became more valuable, rising from 1.58 to 1.61 grams.   Who put that bobbing lighthouse there? Image credit: John Lund / Corbis   Most people would say that gold went up $6 and silver went down 43 cents. We wonder, if they were on a sinking boat,...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com