"PRINCIPAL CORRECTION": INDUSTRY AND GOVERNMENT BLOCKING SHORTSALES

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POLICY CHECK: The issue is not “principal reduction” or even “short-sale”. The issue is obvious. The “values” used in the marketplace were accepted because of lies that people relied upon, whether it was reasonable for them to have relied on those lies or not. It is not “principal reduction” that will correct the situation, it is PRINCIPAL CORRECTION. And that is a correction in our basic principles to reflect a policy of fair play.

The facts are in. There can be no dispute that the government is colluding with industry to prevent the housing industry from stabilizing. The poster boy for this patent policy is the current set of “rules” that exist throughout the mortgage lending infrastructure which prevent anyone who gets approval for a short-sale from receiving a new mortgage from anyone for at least 2 years. It is impossible to think of a scenario where anyone on any side of the political spectrum would approve this intrusion of the government (through Fannie Mae et al rules) into private contracts. In addition, it is just plain stupid. Add the current bankruptcy rules that allow investors with multiple homes to file Chapter 11 and strip the liens down to fair market value but block the lone, one-home homeowner from getting the same relief, and you have a perfectly clear explanation for our currently unfolding economic disaster.

The status of the market is simple and obvious: fair market values of homes are generally so far below the principal stated on the mortgage note that it is impossible for the property to be sold. It would require the typical homeowner to pay $100,000 or more (sometimes much more) to close the transaction with a satisfaction or release of the old mortgage. Since most homeowners do not have this money or won’t part with it if they do (since it would deplete what is left of their resources) practically none of the homes that are under water can or will ever be sold except in foreclosure auctions where the identity of the creditor, the amount due on the obligation, and the status of title are completely obscured, leaving a new field of collateral damage to the marketplace that might end up worse than the the one we already face.

This is an informal but nevertheless highly effective policy of price control which continues to artificially inflate a market that was already artificially inflated by fraudulent appraisals and fraudulent ratings — without which no borrower would have accepted the deal and no investor would have loaned the money. The ONLY beneficiaries of this policy are the players in the financial industry who continue to conduct business behind curtains of obscure “trades,” continuing to make money on a market they have essentially destroyed.

Government and industry continue to paint themselves and all American taxpayers into a corner where the stench of fascism (control of government by private industry) is rising to suffocating levels and producing an American voter who is sickened and disgusted by our failure to follow the only sensible path open to us: break the hold of the bank oligopoly. For years the economists from the International Monetary Fund, central banks from around the world, and “casual” economists like myself have been saying the same thing. But even those who favor smaller government keep voting for politicians who make it increasingly easy for giant profitable corporations to feed at the public trough while the small businessman locks the door for the last time and walks away.

• $700 billion in TARP money is a tiny fraction of what was gifted to the financial industry.
  

• That figure alone could be used as the basis for principal correction, since the banks received the money but continued to foreclose and still ceased lending — the very opposite of what the public expected. Out of the $7 trillion eventually granted, gifted, loaned or guaranteed for the financial industry why isn’t some portion of that money being used to allocate to specific loan accounts across the board? This requires the “principle” of grade school math.
  

• It does not require a new law or rule.
  

• The creditors received trillions of dollars on obligations that were neither in default nor delinquent as well as actual “troubled loans.”
  

• Just applying simple math: If you take 7 million mortgages and apply the $7 trillion received by Wall Street, the borrowers should get credited for the $7 trillion. On average that would mean a credit or correction of the amount of the mortgage note of $1 million per mortgage!

• OK, I’m oversimplifying, but not as much as you might think.
  

• If you don’t like the borrowers getting credit for the taxpayer payment, OK, but why would you give the credit to the financial industry at the expense of the taxpayer? If the taxpayer paid it, why doesn’t the taxpayer get credit for it? Why would you credit the the financial industry for receipt of taxpayer’s money on debt portfolios and still allow them to collect the same amount on the debt?
  

• And more importantly why would you give them the house too?

• And if they got even more money from insurance and credit enhancements why isn’t the taxpayer, the borrower, or both given credit on the obligation that has so obviously been reduced?

• If the credit due on the obligation was merely a transfer of the receivable to the government, OK, lets’ see the U.S. government in these foreclosures, modifications and short-sales — not the original creditors who have already been paid.
  

• The windfall continues to go to non-creditors who never had a dime in the game getting a free house — and we are like sheep being led to slaughter continue believing that the homeowner is not taking “personal responsibility” — right up to the point when the bullet enters our brain.
  

The plain truth is that we are continuing the big lie and the longer we tell it, the longer we maintain it, the stupider we look, feel and act. We know housing lies at the bedrock of our economy but we are pursuing fiscal policies instead of real policies. Small wonder the economy is not responding. If we continue on this path, the United States will cease being a major world power thereby losing access to world markets and credit upon which it desperately depends. The use of the U.S. dollar as the reserve currency will also cease turning all that money out there into demand liabilities — which means that there will be demands made to redeem those dollars into other currencies or even gold. Like our health, we take it for granted until we lose it. And make no mistake, we are losing it.

Those economists have been outspoken in their criticism and very direct in their warnings — any other country would have long since been forced to undertake austerity measures and corrections to their financial systems that de-centralize the financial power structure. Many have suggested that if the U.S. did not have such clear military superiority that the Wall Street scheme that produced this mess would have been declared an act of war against all countries affected.

Because of a mistaken notion that we can allow banks and other companies to hide the true status of their balance sheets — when everyone knows the figures are cooked — we continue to allow the financial industry to do business as usual, making fictitious profits upon which they reward themselves with bonuses of real money. Instead of making things that consumers want, instead of doing things that consumers will pay for, we are a nation with our head in the sand pretending to do business when at least 40% of our “economy” is trading printed, fabricated paper (or now electronic evidence of paper) back and forth between themselves and calling it “commerce.” And then to make matters worse we fail to apply taxes on income that would apply to anyone else who reported such incredulous profits, leaving the taxpayer with a larger and larger bill whose eventual height cannot yet be determined. Federal and state budgets would be substantially enhanced by the collection of those taxes, but they don’t because they are controlled by the financial oligopoly.

Thus we are continuing to pursue policy that ignores the elephant in the living room — there is nobody left to buy homes, consumer goods and services because they don’t have any money nor do they have access to it. They perceive themselves as in debt up to their eyeballs and now the federal government is telling them that the surplus we had 10 years ago is now a deficit that puts each newborn in debt for the rest of their lives and the lives of their descendants.

REALITY CHECK: Unless we all state the obvious we can’t fix the problem. As long as we continue to direct our attention at “other issues” that are fabricated distractions from the financial industry, the housing market will continue to bust lower and lower levels, taking the rest of the economy with it, and causing social chaos as people are required to relocate with nothing left of their credit scores or bank accounts.

REALITY CHECK: If a new policy would allow the market to correct itself, if the markets caused an economic revival, if new businesses were created, if U.S. innovation regained its first place in the American arsenal, and if jobs were created with rising median income, what difference does it make if some people gain an unintended advantage? We have that unintended advantage right now with all the money being concentrated into a handful of banks and other oligopolies.  If everyone was more prosperous and secure would we really care if some people took undue advantage? And if the answer to that question is YES, then why don’t you care now because the advantage, unfair, illegal and immoral as it is, is now going to people who not only took advantage of the system but destroyed the entire financial system in the process.

POLICY CHECK: The issue is not “principal reduction” or even “short-sale”. The issue is obvious. The “values” used in the market place were accepted because of lies that people relied upon, whether it was reasonable for them to have relied on those lies or not. It is not “principal reduction” that will correct the situation, it is PRINCIPAL CORRECTION. And it is a a correction in our basic principles to reflect a policy of fair play. It is a policy that simply acknowledges the truth: that the prices used for sale of loan products and mortgage bonds were bogus. Starting from that premise existing laws, rules and regulations could take care of most of the problem. A change in the bankruptcy laws that allowed all petitioners the same relief for lien stripping to fair market value instead of excluding the small homeowner, would be very helpful as well.

Tags: Fannie MAe, principal correction, principal reduction, short-sale
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