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Posts Tagged ‘mortgages’

It was Albert Einstein who said that the definition of insanity is, “doing the same thing over and over again and expecting different results”. Congress has now passed legislation that will extend the first time home buyer tax credit deal – that’s the one that encourages people to buy a house now so they can pocket an $8,000 tax credit. Now, even better, Congress has also included in the legislation a $6500 tax credit for people who have owned their homes for five years.  The deal is you have to flip the house you are in and buy another house.  Then you have to stay in that house for three years.  This income tax credit is, of course, in addition to the exclusion from income taxes of up to half a million dollars profit you make on the sale of your existing house.

So, let me see if I understand this. The economy of the entire world has been brought to its knees by a housing bubble and the fix for the global economic meltdown is to create another housing bubble?  Is that it? You mean it’s like giving heroin addicts a little more heroin because they are having withdrawal symptoms? So when the symptoms go away everything is OK?  So what about those of us who bought a house four years ago? Why can’t we play too? Or what about those of us who are saving up for a down payment for our first home but we know we’ll never have enough until the summer? What about us?

So – this is going to help the economy, right? OK. Whose economy does it help? The people who buy the new houses? Probably not much, after all they are about to be saddled with a new mortgage.  How about the people who build the houses? I suppose so. It will probably keep them employed for another six months or so while they build the new houses for the new bubble. How about the banks? Well then, I think now we’ve struck pay dirt.  The banks will be giving out their usual, or unusual, 30 year mortgages, thus assuring themselves of at least tripling their investment over time.  Sure, this tax credit sort of stimulus will give a multi-million dollar boost to the home construction industry. However, over the period of 30 years, it will create a multi-billion dollar boost for the banks.

So where does that leave us? Congress is making rules that primarily benefit the big banks and a little bit of the money trickles down to the ordinary people, who will naturally wind up paying for this benefit to the banks via their shiny new mortgage payments – or via their future taxes which will be used to pay for the tax credits they just received.  In the end the net big time winner is the banks – which is probably the intent of our Congress which has grown fat and bloated, feasting upon the “contributions” from the half a zillion lobbyists who troll the streets and alleyways of our nation’s Capital.

Here’s a question: how many professional economists has our Congress consulted for guidance about this? Has Congress ever talked to Nouriel Roubini, the economist who accurately predicted the worldwide economic meltdown? Has President Obama ever talked to him? How about Paul Krugman, the Nobel prize-winning economist? Is he in the loop?  Somehow, I don’t think so. We all know who is in the loop in Washington. It’s the bankers and their lobbyists.  It’s the insurance companies and their lobbyists. As they say – we have the best government money can buy.

Here’s another question: what is the grand vision? Where do we go from here – economically, I mean. And how do we get there? Could someone in DC just stand up, preferably the President, and just lay it out for all of us? Or do they just think it is all too complicated for us children?  Is that why they are throwing us these scraps of cake to feed on – little stimuli to keep us sated while they figure out how to get the banks on top again?

OK, one more question: if our Congress cared so much about us instead of caring about the wealthy bankers, why don’t they put a limit – a hard and low limit – on credit card interest. Something like 12%.  Why don’t they put a hard limit on mortgage interest rates – like maybe 8%?  Why doesn’t the Congress protect us citizens from the raptors at the banks instead of allowing them to feed off the flesh of the American people? We know why.  The banks own Congress.  That’s why we now embarking on Housing Bubble Part 2.

Better find a seat in a lifeboat now.

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Here’s a question for you: when a mortgage melts down, where does the melted money go? Is there some sort of giant drain in the economy where it all flows? The experts are saying that before the current meltdown is finished the total losses, from the banks alone, never mind the poor guy whose house was foreclosed, will be in the trillions of dollars. That is a virtual flood of melted money. But, I ask again, where does the money go? Are there only big losers in this process or are there big winners too?

If you read one of my previous blogs you might remember that I had mentioned that there is a law of conservation of energy in physics. I am willing to bet there must be a similar law of conservation of money in economics. Let’s face it the money went somewhere; it didn’t just vaporize, right? OK, now for my second question. I turn once again to the immutable laws of physics, Maxwell’s equations to be precise. Remember the one that says Div B = 0? No? Really? Well, let me refresh your memory. It is interpreted as meaning that there is no such thing as a magnetic monopole. In other words for every magnetic north pole there is a corresponding south pole, and vice versa. Taking this law and confidently applying it to economics, there must be a law that says if someone loses a bunch of money then there is somebody else who gains the same amount, and vice versa.

I thought it might be interesting to try to figure out who are the big winners and losers in the great mortgage meltdown of 2008. Let’s see if we can understand this by looking at the purely hypothetical case of Fred Smith. In 2006 Fred attended a seminar entitled “How to get rich buying and flipping houses”. Fred learned that he didn’t need to have any money, a job, credit, or anything, except a pulse, in order to get a loan from his friendly neighborhood bank’s loan officer. That’s because the loan officer had gone to the same seminar Fred had gone to, and it was common knowledge that everyone could make a ton of money by buying and flipping houses. Our friendly loan officer was happy to OK a loan for Fred of $300,000, the full purchase price of the house, and Fred moved in a week later. So where did the money go?

Well, it didn’t go to Fred, except for about one heartbeat. Then it went to the contractor who built the house who turned around and banked some of it in his own, ever-growing bank account, and then gave the rest to his workers who built the house, a few of whom were actually American citizens. Eventually this money found its way to Wal-Mart because these workers needed to buy school clothes for the children and in turn Wal-Mart sent the money to China, after taking a nice profit and putting that in their bank account. The Chinese factory owner took his profit and banked it and then paid his Chinese workers who put their tiny paychecks in their bank accounts.

About six months later, Fred, who hasn’t sunk a dime into the house and has never made a mortgage payment and who hasn’t been able to flip the house for $400,000 learns that the bank is foreclosing and taking possession of the house so they can sell it and get their money back. Except, it’s not the bank he borrowed the money from that is foreclosing, it’s a big European Bank who bought the mortgage, thinking it was AAA rated. It turns out that this was only one of about 10,000 such mortgages this bank bought.

Unfortunately, after Fred is booted from his house, the big European Bank is not able to sell Fred’s house, nor can it sell the remaining 10,000 houses it has foreclosed upon. This bank now has huge losses on paper and the people who have savings accounts in this bank get scared and start withdrawing their money and the bank has to get rescued by the national government, which promises to pay all the bank’s debts. The government raises taxes on everybody in the country and pretty soon the bank is back on an even keel and everybody is happy, except that the citizens of that European country will be paying higher taxes for about…oh…let’s see…the rest of their lives. Meanwhile, don’t worry about Fred because he was able to get another loan and is now living in another house.

So is that what happened? In some cases, yes, but in other cases, the U.S. banks held onto the less toxic mortgages themselves or sold them to other U.S. banks, or more likely sold them to those great big mortgage magnets Fannie Mae and Freddie Mac. Can you see where this is going? As we all know Fannie Mae and Freddie Mac now own a ton of these toxic mortgages. (That is a new mortgage classification. The classes go from AAA to C and just below that they are officially called Toxic). The money that Fannie and Freddie paid to the U.S. banks has flowed into the U.S. economy as explained above, in enormous amounts, and everybody whose hands the money passed through took their cut starting with the contractor, then to his employees, to the stores they shopped in, to the factory owners in China, then at last to the low paid Chinese worker who banked his rewards from the Global Trickle Down Economy. Now, as Fannie and Freddie are looking at staggering losses we can take comfort in knowing that it won’t be the stockholders of these organizations who will bear the brunt of the losses. I mean, why should they, right? Our far-sighted government recently took steps to make sure that our government stands ready to bail out Fannie and Freddie with the semi-infinite resources of the U.S. Treasury. Oh, by the way, do you know where the U.S. treasury gets its money from? Yep, that’s right, but let’s keep it to ourselves, OK?

You know, it’s interesting, I saw a full-page ad in the paper today. It said that if I attend a seminar I could learn how now is the time to make money in real estate by buying foreclosed properties and fixing them up and selling them. I’m thinking this might be the time to buy – I mean, after all, I don’t see how I could lose. What do you think?

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