Having trouble paying that mortgage each month? You are not alone. Mark Zandi, Chief Economist at Moody’s economy.com estimates that 15 million Americans owe the bank more than the home is worth. (Zillow Real Estate Market Reports says that the percentage of single-family homes with negative-equity mortgages fell to 21.5% last year, but that was due to higher foreclosures!)

According to dailyfinance.com, “…many homes are worth only half of their mortgages. There are 4.1 million homeowners with more than 50% negative equity and another 5 million homeowners with 20% to 50% negative equity.” ( http://srph.it/b2zIRM)

So what to do? Many have tried to re-fi, but are stymied by their bank or mortgage holder because the conditions that make paying difficult also have lowered their credit scores. Home owners are finding to their dismay that even a late or missed utility bill has lowered their FICO scores more than in the past.

President Obama received accolades for putting forth the Home Affordable Refinance Program (HAMP), and two years later we find that the banks and the bureaucrats have, for whatever reason, been dragging their feet to say the least.

According to a report in the Boston Globe January 26, 2011, of the millions of homeowners now facing foreclosure, only a small fraction even stand a chance of receiving ANY help from Obama’s much balyhooed HAMP program. In his testimony before Congress, Neil Barofsky (the Inspector General appointed by President Obama to oversee the $341 billion bank bailout) reported that after two years, “….only 549,620 mortgage modifications have been started”- far short of the 4 million already facing foreclosure. And add the 15 million homeowners who upside-down (or “under water” as the banks say) and you have the formula for disaster all over again.

Abysmally, the Globe reported that of the few who did manage to get their loans modified, there is a “…disturbing number redefaulting” all over again. Congress responded immediately: three members of the House have submitted a bill to yank the $30 billion in bailout money and scrap the entire HAMP program.

Sorry to disappoint you kiddies, but it was Clinton and the Dems who declared that EVERYONE deserves to live in a house. (This debacle goes back to the early 90′s.) Bush and Company tried to put the breaks on in 2002 by trying to reign in Freddie and Fannie, but was blocked by the Democratic Congress. Hey, we all bought into it in the rush for low-money down mortgage money. Conventional wisdom holds that a mortgage on the house you live in is a special kind of debt, one that, mostly because of favorable tax treatment, is so cheap that you should be in no particular hurry to pay it off. 

But there is a popular heresy that opposes this firmly established orthodoxy. It holds that all debt is a bad idea, and paying 3X to the bank so you can save X on your taxes is loopy. Free Money Finance made this case recently. And Dave Ramsey is probably the high priest of this particular sect.  But you should really READ the contract you signed. The contract says that you get to live in the house as long as you pay the bank. If you stop paying the bank, the bank gets the house. Simple. It’s not like the bank didn’t agree to that, or agree to the value of the house at time of purchase. The question to ask is why was the bank so irresponsible in its end of the agreement?

It has to do with “Fractional Reserve Banking”, an esoteric term most have never heard of that allows banks to monetize (read: make gobs of money out of nothing!) all sorts of paper and documents. Banks are regulated and controlled by the Federal Reserve (which, by the way, is a private bank, and no more a part of our government than Federal Express), and the Fed says there must be a “reserve” at all times, a small percentage of what is reported on the balance sheets. (And there is a way they get around that also, by a percentage of the percentage….but that’s another article.) That is the actual Federal Reserve Notes (FRN, or what you have in your wallet…its called fiat banking) that are kept in drawers and vaults. The rest are numbers on ledgers, bits in computers, etc. that are created when you sign a note. Any note. Like a mortgage.

Lets say you walk out with a $100,000 mortgage; you have your signed copies and are feeling pretty good at the rates you got and your payment. The bank now has an instrument. They hold the “note”, and as a matter of rote do several things with it. One of the first seems absurd on the surface: they list it as an asset. Now you or I would not, to us it is a debt, but the bank has your signature, and they can be monetized. That means they are tangible assets, like currency. They report to the Fed that deposits just went up by $100,000 that day by declaring this asset. According to the reserve rule, they must have $10,000 on hand in FRN’s (which we know as ‘money’), but in reality they have only a fraction of that, usually $1,000 (through a complicated play on words and loopholes, but they all do it), but for this example we say the whole $10,000. That means because of the rules of fractional reserve, they have an asset of $100,000, but only have to retain $10,000, so Mr. Vice President tells his loan officers to go make more loans because we just got another $90,000 to lend out! And this happens over and over, every day in every bank. It is how banks “monetize” your signature without you ever being aware of it or authorizing it.

This is now being touted as justification for “strategic defaulting” of one’s mortgage, and articles abound on that as a way out. I am not going to delve in that already deep chasm, but will say one should be aware of their own state laws, for some are a recourse State (like Florida) that allows the lender to go after you and sue for recovery from your assets (which you really cannot hide if you have not already made yourself levy and lien proof, but that also is another post…).  

But before we even get to the walk-away stage, check to see who really holds the current mortgage. There’s a really good chance that the mortgage was already cut up and sold, meaning that the bank already got “paid” the value of the mortgage and you have no contract with the new holder of the mortgage. (Same with credit card debt. Once sold, you have no contract with the collections agency hounding you.) Sure they can sue you, but they wouldn’t win the suit. It rarely happens though because of the fear factor involved in going to court. They usually win by default when you fail so show up in court.

Now let’s get to the really interesting part… the contract! One of the five requisites to a legally binding contract is something called consideration. It basically means that both parties must bring something to the bargain, usually money. And, in the case of mortgage, it is about the money. Here’s the catch. Due to fractional reserve lending, the bank is not actually lending any money to the potential homebuyer, remember? The bank only has a fraction of the reserves it claims to have, and therefore is really lending NOTHING! It’s all accounting columns and electronic digits that are involved in the mortgage. Your signature is what creates the money (i.e., monetized), so the bank has no consideration in the contract. This therefore renders the contract null and void! But believe me, no judge would rule in your favor. (It’s just important to know from a moral standpoint. The entire banking system is immoral!)

So you see why the banks don’t “want their money back in full….” because, truthfully, they never lent any money to begin with. Fractional reserve banking insures that no actual “money” is lent! What the banks want are the houses and properties! They have some value and worth, unlike what is happening to the dollar. When the dollar crashes, the banks want to be holding tangible assets, not worthless paper. The properties go into foreclosure at the owed price so no one bids on them. The bank (or a subsidiary, or even another bank) buys it back, usually for $100 and claims the loss. The bank can buy it for a hundred bucks, but the public can not.

They can now sell the properties at many times over what they bought it for… and sell them they do to bulk buyers or brokers, who even then get lower prices than you or I. Or they auction it off. Or list it with MLS agents. It does not matter, as the profit is built in the moment they take it back for $100!  Along the way through this process the public pays at the appraised price, or more. This happens quite often at auctions. Sometimes hagglers are sent in to get prices up, and sometimes buyers just over bid to get a property.

In any scenario, the banks win. And Rep. Jim Jordan of Ohio leads the charge to “pull the plug” on mortgage modifications. So the questions remains about “ever getting ahead” and “…putting missed payments on the end…”, (I know a church and pastor that have done that for years with late fees, but that also is another post), and logic tells us that no, we cannot keep “missing” this one or that and expect to. The salient crux of the matter is not “…can we get ahead?”, but can we survive building and residing in these “houses of cards” we create, and expect to weather the economic winds?  

I say its time to pray, America.

Winds are blowing from the general direction of Capital hill of a different kind of global warming, and the economic climate change it brings about may make many more start “treading water” as they watch their homes “sinking under water” in this new round of storms.

Image c/o TheTruthAbout

Tags: foreclosure, mortgage