Stop Paying Your Mortgage (and Followup)

[Anonymous]

This is kind of like "A Modest Proposal" for individuals losing out on decreasing home mortgages.

http://market-ticker.org/archives/636-Stop-Paying-Your-Mortgage-Today.html

Stop paying your mortgage.

Seriously.

Assuming your home is worth equal or less on the market today than your outstanding mortgage balance, of course.

You deserve to live free for a year, and you deserve to have your home price come way down so you can buy it back in a few years for much less.

You've already been taxed to the tune of $700 billion for a bailout for the bankers, even though you told Congress "no".

Now the FDIC and Treasury are "working on a plan to curb foreclosures."

In return I recommend that every American with a mortgage immediately stop paying.

Today.

Whether you can afford it or not.

[Anonymous]

And the follow up next day (excerpt)

http://market-ticker.denninger.net/archives/637-Money,-Credit,-and-Counterfeiting.html

Money, Credit, and Counterfeiting

Well that produced a furor ("Stop Paying Your Mortgage")

For those who haven't followed The Market Ticker for the last year and a half, explanation may be in order.

Most of the pique, where it was expressed, came down to "you gave your word when you signed the documents."

Indeed.

But you were defrauded. The entities on the other side of the table were engaged in counterfeiting of the money (credit) supply.

Literally, for the last 20 years, and most specifically, for the last five.

So the obvious question arises - if you go to the bank and get a loan but they give you fake dollars they printed on their color copier, are you then obligated to pay them back with real dollars you earn by working your fingers to the bone?

I argue the answer is not "no" - it's "HELL NO!"

Let me explain.

The "shadow banking system", including ratings agencies, investment banks and hedge funds, were engaged for years in the intentional misrepresentation of credit quality. In conjunction with those who were bought and paid for to provide these grossly-inflated "ratings" (the famous "we'll rate a deal securitized by cows" quote in sworn testimony before Congress), the banks, issuers and traders of this debt gamed the ratings (and reserve) system so they would not have to hold back as much in reserves as would have been required on the actual underlying credit quality. That is, they said that there was less risk in these loans than really existed.

Why is this important?

Because by under-reserving on purpose these entities obtained a capacity to loan (and for you to borrow) that did not exist, and as a result, there was more money available to lend - lots more and at a much cheaper interest rate - than should have been the case.

Since money and credit are fungible - that is, they both spend exactly the same (your credit card and $100 in 20 dollar bills spend the same way at the store; they both buy exactly the same amount of goods or services) this had precisely the same effect in the economy - and on you as a consumer - as the banker literally walking over to his color copier and running off $100 bills by the truckload.

Now if you see "money" flying around the economy and it looks easy to access, you'll be inclined to go after it with far less concern than if there is little money (or it is expensive), right?

In order to properly leverage against risk you must be required to hold commensurately more reserves against higher risk instruments otherwise the effect of your operation is to allow you to create credit without a proper capital backing, and when the bet goes wrong, you (and potentially the entire banking system!) blow up.

This not only was not a mistake it is still going on:

"In essence, then, Goldman thinks it could lower its overall leverage without having to significantly reduce risk (and the prospects of high returns) from its investments. That’s because the government’s gross leverage calculation does not discriminate between low-risk and high-risk leverage."

There is the essence of what was done, in two sentences: The government explicitly has not and still isn't requiring more reserves to be held against high-risk leverage.

This, by the way, was NOT a "zero sum" game. You paid (and still are if you're paying your credit cards and mortgage bills) for those inflated assets with real money (NOT credit) - money that you brought into existence with your blood, sweat and tears. Your purchase of these assets (or debt payments) were not made with counterfeit money (credit); they were made with real funds generated from real work on your part.

But the price you paid was jacked up as a consequence of all the counterfeit credit (money) flying around in the economy.

Counterfeiting $100 bills is a serious federal offense. The US Secret Service will come haul you off and toss you in the hoosegow for cranking up your color copier and printing off a truckload or three of fake Benjamins.

So if counterfeiting paper money (which is in fact credit) results in a 20 year date with Bubba, why aren't the bankers, ratings agencies and even government officials involved in counterfeiting credit in the economy wearing orange jumpsuits, picking up trash alongside the road, and concerned about dropping the soap in the shower?

Instead these same folks got a bailout from your REAL money (future tax receipts) via the Treasury - more than $163 billion so far - and are going to pay more than half of that out in dividends to shareholders.

Worse, instead of forcing all those who committed these acts into the open and thereby causing the default of the bad debt (resulting in both consumers and lenders who did imprudent things going bankrupt) we continue to try to "hide the problem" by transferring the risk (leverage) to The Fed! As of the latest data release this evening The Fed is now running roughly a 50:1 leverage ratio, and its leverage is increasing at an astronomical rate (it was 40:1 just a couple of weeks ago!) as Bernanke furiously attempts to hide both the fact that all this counterfeiting of credit took place and prevent the impact of same from being fully recognized on the economy.

[Anonymous]

Anonymous wrote:This is kind of like "A Modest Proposal" for individuals losing out on decreasing home mortgages.

Sorry, I meant decreasing home values. People who have a mortgage for $500,000 but their home is now worth only $300,000.

[Anonymous]

The above proposal could be attractive to 20% to 25% of Americans who have home mortgages.

http://www.reuters.com/article/newsOne/idUSTRE49S3Q520081031

One in five homeowners with mortgages underwater

Nearly one in five U.S. mortgage borrowers owe more to lenders than their homes are worth, and the rate may soon approach one in four as housing prices fall and the economy weakens, a report on Friday shows.

(snip)

Seven hard-hit states -- Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio -- had 64 percent of all "underwater" borrowers, but just 41 percent of U.S. mortgages.

(snip)

Nevada was hardest hit, where mortgage borrowers on average owed 89 percent of what their homes were worth, and 48 percent had negative equity. Michigan was second, with an 85 percent loan-to-value ratio and 39 percent of borrowers underwater.

New York fared best, with an average 48 percent loan-to-value ratio and just 4.4 percent of mortgage borrowers with negative equity.

But Wyss said this could change as financial market upheaval transforms Wall Street. This month, New York City Comptroller William Thompson estimated that the city alone might lose 165,000 jobs over two years.

"We're going to see home prices coming down pretty significantly in New York," Wyss said. "A lot of people are losing jobs, and won't be getting their usual bonuses, and that leaves less money for housing."

[Anonymous]

http://www.nytimes.com/2008/10/31/business/31bailout.html?_r=1&hp&oref=slogin

Mortgage Plan May Irk Those It Doesn’t Help

As the Treasury Department prepares a $40 billion program to help delinquent homeowners avoid foreclosure, it confronts a difficult challenge: not making the plan too tempting to people like Todd Lawrence.

An airline pilot who lives outside Norwich, Conn., Mr. Lawrence has a traditional 30-year mortgage that he has no trouble paying every month. But, thanks to the plunging real estate market, he owes more on his house than it is worth, like millions of other people.

If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Mr. Lawrence says he believes sober souls like himself are also due a break.

“Why am I being punished for having bought a house I could afford?” he asked. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.”

The plan, still under development by Treasury, is part of the economic rescue package passed by Congress earlier this month. It is aimed at aiding up to three million beleaguered homeowners by reducing their monthly payments.

Washington and Wall Street are frantically seeking to stabilize markets by curtailing the onslaught of foreclosures. There are now at least four major plans to aid homeowners. But experts say it is difficult to design these programs in ways that reduce the indebtedness of the distressed without giving everyone else a reason to mail the keys back to their lenders.