A Take on the Mortgage Mess

 

I was having a discussion the other day, with my son, who is in the business of developing real estate. He was upset at the fact that there are people out in the marketplace who have stopped paying on their mortgages and because of the huge logjam of defaulting properties are just living free in their homes until the banks foreclose. They then refuse to leave until they are paid a buyout to keep the case from going to court which could take the bank or a developer who has acquired the house, months or even years to accomplish. He feels that it’s not just a major problem in the marketplace but also a moral one. I’m not so sure  I agree, at least not about the moral part.

 

The argument is, that it is immoral not to honor your debts. Maybe, but you must first consider the debt itself. When the people who held the original mortgage have done everything humanly possible to turn the debt sour, including selling to people they knew couldn’t afford the debt, dealing off the paper to others so as to avoid responsibility for the debt, or any consequences of it, I find it hard to have any moral responsibility to them. These guys are low-life thieves, who should be in jail. They got far less than they deserved, considering that they are the basis for the destruction of the nation’s economy.

 

The situation looks like this. You bought a house for $500,000 and gave a $50,000 down payment. Now you have a mortgage of $450,000 on which payments & interest will raise the cost of the house to close to  $600,000, but that’s okay because you expect the value of the house to rise and you will have an asset that eventually will be worth more than you paid for it.

 

 

But the bottom falls out of the market and suddenly the asset for which you expected to pay around $600,000 is worth only $250,000 and very little hope of it ever getting back up to the projected price in your lifetime. You look around and you realize that the cause of your asset losing valuation is the actions of the guys who financed the mortgage and now, for all practical purposes, own your house. What do you do?

 

Well, a lot of people, realizing that they are in a no win situation, just stop paying their mortgage and hope that they can occupy the house long enough to recoup the down payment money, by living rent free. Others, those who put down almost no money, because the banks were so hot to get those mortgages, which they would then bundle and sell to brokers, simply realize that they have fallen into a position where they can get clear of their down payment debt faster and maybe even make some money by stopping mortgage payments.

 

 

The problem, as I see it, is that you can’t keep people from defaulting if they don’t fear losing their home, a home, which is now worth less than they owe on it. That’s the big trade-off and that’s where the line gets drawn. Of course there are some people taking advantage of the situation, but the main fault has to be placed at the feet of the banks, that ultimately failed in more ways than one. Mainly they failed because they issued mortgages to people who they knew couldn’t afford them. What makes that failure criminal is that they did this knowing that they were never going to take responsibility for these mortgages because they would package them into rotten securities and ship them off to brokers who would then sell them to unsuspecting investors and as they were selling them bet against their own product by shorting the sales.

 

This was a plan destined for failure from its initial inception, and it was the basis of destroying our national economy. No one owes these bankers anything but a jail sentence. But, instead of condemning the banks for this illegal behavior and sending most of their top executives to jail, we bailed them out of the nuclear waste dump they had created, by giving them taxpayer money to finance these criminal executive’s bonuses.

 

Sure a few individuals are taking advantage of this, bank created, mess to get away with something, but they are a small piece of the pie. The banks could have avoided the whole mess even after it started by doing any one of the things listed below but they didn’t.

1-  They could have immediately adjusted the underwater mortgage contracts to reflect the new value of the property, a value which they had caused to drop. Yes, it would have adversely affected the banks immediate bottom line but if those people kept paying mortgages, even smaller ones, the banks would have eventually had a chance to recoup and even make a profit.

2-  They could have extended the mortgages thereby lowering the monthly payments and making the retention of the house affordable enough for the homeowner to bet that if they could retain the house, eventually they would have a shot at it becoming valuable again.

3-  They could have adjusted the rates of interest, thereby bringing down the monthly payments to achieve the same goal as above.

 

The fact is, they did nothing, exacerbating the problem and causing the crises to explode. This is not surprising when you consider that the initial packaging of the mortgages was done to avoid responsibility in precisely these circumstances. The bankers are criminals and should be in jail.

 

Not knowing where your family is going to sleep tonight must be one of the most debilitating conditions known to man but the banks placed millions of Americans in just those circumstances. The officers of the banks and those of the brokerages who handled the packaged mortgages are criminals and should be treated as such.

 

Sure a lot of people took out mortgages they couldn’t afford but most people are very stupid. Just before the election, I just saw a poll where 15% of Republicans in Ohio think Romney had more to do with killing Bin Laden that Obama. That number went up to 29% in North Carolina. I don’t know how these morons came to this conclusion, maybe listening to Michele Bachman, but the big hit comes when we discover that 56% found the question too difficult to answer. These people are too stupid to breathe. You can’t expect them to understand a mortgage contract.

 

I repeat, the banks deliberately gave out mortgages to people they knew couldn’t maintain them. They did it knowing that they were going to dump those fetid mortgages on the investing public and would not be responsible for them. The brokers took the mortgages, realized that they were toxic, and instead of returning them to the banks, sold them as good investments even while they bet against them by shorting them. All this is criminal behavior yet none of the slime involved went to jail… yet.

 

Yes, there are a couple of people screwing the banks.  Too damn bad about the banks. If anyone ever deserved to be screwed it’s the banks.