The Mortgage Deal – Brilliant
There are many reports on the mortgage deal. Here is a brief version: 'l'.
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.
After writing this post, I was reminded by a friend that the mortgage debt relief act is due to expire this year.
I must therefore assume that any principal reduction is going to taxable unless they change the law. It is a mess.
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
2 Responses to “The Mortgage Deal – Brilliant”
Most read in the last 20 days:
- India: The World’s Fastest Growing Large Economy?
Popular Narrative India has been the world’s favorite country for the last three years. It is believed to have superseded China as the world’s fastest growing large economy. India is expected to grow at 7.5%. Compare that to the mere 6.3% growth that China has “fallen” to. India's quarterly annualized GDP growth rate since 2008, according to MOSPI (statistics ministry) - click to enlarge. The IMF, the World Bank, and the international media have celebrated...
- Gold Sector Update – What Stance is Appropriate?
The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
- Don’t Blame Trump When the World Ends
Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook. One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
- What is the Best Time to Buy Stocks?
Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity? Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
- Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
- Trump and the Draining of the Swamp
Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
- Gold and Silver Divergence – Precious Metals Supply and Demand
Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
- Making America Great Again – How to Judge Policy
A Simple Formula MIAMI – How do we know if new programs will make the economy better... or worse? Here’s a simple formula: W = rv (w-w – w-l) That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges. Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off, there is nothing left of it... except the essential heartwood. When devising a win-win,...
- When Trumponomics Meets Abenomics
Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway] Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
- The Great Wailing
Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations. Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any... You’d think Washington had been invaded by Goths, now...
- Receive a One Percent Gift When Buying or Selling a Home
How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine. Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell. The people who took this photograph probably want to...
- Silver Futures Market Assistance – Precious Metals Supply and Demand
Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday. Taking off for real or not? Photo credit: NASA Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...