Today's article is part 2 of the article which was posted yesterday:
“The Foreclosure Crisis and What It Means to You.”
So to recap: Mortgage terms are approved for so long (15, 30, or even 40 years) because they are assets on the banks’ books—assets which give them the power to lend eight times the amount of that asset. Yes, this means that the mortgage companies are making money on air—nothing new if you’ve been reading my previous articles on Financial Preparedness.
This is why it’s such a hassle for you to have the audacity to pay your mortgage off early. Think about it just one second. What happens when you pay your mortgage off early? Think…think…think…Oh yeah, that $2,000,000 in loans which they have issued out there as a result of your $250,000 loan now has to be completely redone. Sure they can still have the money out there in loans in exchange for the $250,000 of cash you used to pay off your mortgage. That is, unless of course they’ve been spending the money you’ve been paying all along OR have been issuing other loans at a eight times the value of your payments to the bank all along. But what really throws a wrench in their books is when a person can no longer make the payments on their home and thus has to walk away. Guess what that means? The bank no longer has a $250,000 asset; which means they just got their legal lending limits reduced by $2.5 million. So what do they do? Call the $2.5 million in loans in? Hardly.
Calling loans due on a moments notice is only permissible in the commercial world of lending. It’s true that a commercial loan can be called due for any reason at any time. A commercial property borrower could be showing great profit and loss, great history, and it does nothing to insulate them from this one clause in their loan contracts. This clause was originally created because the commercial market is highly volatile. Business can change simply because of a bad comment on the internet and commercial bank divisions never want to take on that kind of risk. As a result, the “any time, any reason” clause is used in all commercial closing documents.
Case in point: Remember one of the consequences of the terrorists attacks of 9/11? It had a huge impact on the hospitality industry. As a result, thousands of loans were called due on hospitality properties before the banks started hemorrhaging money. In addition, all lending on hospitality properties was put on hold for nearly 2 years. You had to be some kind of squeaky clean and wealthy and profitable in order to get funding on a hotel or motel.
Impact of Foreclosure
One in eight homes is now seriously behind on their mortgage payments. This is a state of the industry that was NEVER anticipated by the Federal Reserve or the Treasury Department. It was inconceivable as it never happened before—not even during The Great Depression, because there weren’t as many homeowners percentage-wise as there are now. Make no mistake about this folks, this was not a planned crisis—although there are plenty of those. The mortgage industry thought that the Emperor’s New Clothes story was just some fantasy fable and that they were the exception to the rule. This particular crisis bit the mortgage industry and all of those who are heavily invested in it, right in the butt!
Having such a large percentage of their assets literally disappear overnight, mortgage lenders are scrambling just to maintain the status-quo. Their hopes are that they can foreclose and resell the delinquent properties fast enough-before they get audited and subsequently shut down by the FDIC for not having the proper asset to lending ratio. As a result they have been foreclosing like crazy without having the original promissory notes (as they were lodged with the trading platforms)—which ARE required in order to foreclose—AND without taking time to dot all of their “I’s” legally. Even without the trading platform angle coming into play, the servicing of the mortgage loans get sold off and resold so many times, it’s VERY, VERY rare that a mortgage lender has the original Promissory Note any longer. Again, this crisis is unprecedented. They never thought that they would have citizens savvy enough to demand evidence of the original Promissory Note. Commercial law requires UCC possession of the original note, which is what creates a “holder in due course.” And only a holder/lender in due course can foreclose on a property. Of course, that then raises another problem because then you have title problems when the lender sells the house to someone else; why, because when it’s contested in court and a judge finds that the foreclosure wasn’t done legally, there is a new owner holding convoluted title to a home he doesn’t own but went through hell to purchase! This is why Old Republic Title Company just announced that they would no longer do any title work for any GMAC or Chase mortgage loans—that involves the 4th largest and the 3rd largest mortgage holders, respectively.
Let’s not forget that the U.S. Treasury is the largest majority stockholder of GMAC after giving them $17 billion dollars last year. Aha. Are you seeing things a bit more clearly now? So much for thinking that they were too big to fail.
This whole mess is falling down around the U.S. Treasury's ankles because of the precariously perched house of cards that we’ve been building as a nation is finally coming to light for what it is (or have been permitted to be built as a result of our apathy and their secrecy). All money in our system only gets created due to a debt now—not assets. And when you double dip the showing of assets on your books, and then lend out at a ratio of 92-8, once you lose your grip on that holding, everything free falls. Now you’ve got a bank with 2.5 million out there in debt thanks to this one house valued at $250,000 that they are showing as an ASSET. So, what do the banks have to do? They have to call in that debt! But if it’s a residential mortgage, they aren’t allowed to do that. As I’ve said previously, if it’s a commercial loan, then they can, but that then spirals into a mess in the world of small and mid-sized businesses—which then affects jobs. It only makes our economic situation that much worse—and unfortunately this is only one of the horrible symptoms coming to light due to our debt-based economy. This particular crisis is indeed affecting the skin and bones or our country—our places to live, to raise families, to rest and recharge. But the currency on which we’re relying as legal exchange of these transactions is the heart of the problem. How many people do you know still alive with no skin, bones, or heart?
OK. Just to clarify: the books of the banks are now "cooked" because the assets which they had are no longer viable; which means that the lending which they issued based on those assets are about to crumble as well. See the looming domino effect, folks? So, here’s part of the reason why I’ve been begging folks to get completely out of debt—even their mortgage. Do you really want to be entangled in this mess? Do you really want to risk the roof over your head while these guys try and get their acts together? This is EXACTLY why the modification program came out—to put a band-aid on this situation so that it didn’t blow up in their faces. This is also why the modifications are ONLY available to those who are delinquent on their mortgage loans. The mortgage lenders are in such hot water, they need every little dime they can get from those people who are paying their loans like they should. They have so much monetary hemorrhaging going on right now, they are now required to be UBER choosey in granting the monetization loans solely to those who they believe will not put them in this dangerous position in the future. The problem with that, though, is that they are applying a mythical 800 credit score criteria to persons who have already shown themselves to be 580 credit score kind of people—as a result of unemployment, inflation, weather-related crisis’, etc. But when it comes to their lending regulations, that’s all the lenders are really permitted to consider, even in the midst of this crisis. They still have to be accountable to the lending regulations, regardless of how much money the U.S. Government, aka We the People, throws at them.
Now, let’s look at the bailout money. As you know, Fannie Mae and Freddie Mac, as well as a slew of major banks, have received U.S. Government bailouts. Such bailouts were granted under threat that the sky would fall if it didn’t take place. This is true, but the real question is WHO’S SKY WOULD FALL? The answer is the Federal Reserve, the U.S. Treasury, and the corporation of the U.S. Government—again—it’s the corporation, not our nation that would be sorely impacted if the bailouts were not created. Perhaps now you’ll understand why the bailouts have done NOTHING to lube up the rails of lending and credit extension at these banks; they HAVE to hold on to this bailout money in order to cover the gaps that are now being brought on by the massive amounts of foreclosures they are facing! Sure these banks received X millions of dollars in bailout monies; but that X million of dollars only enables them to continue to play in the trading platform game—something they would have had to cease if they had to call in all of the appropriate loan volume.
So, let me finish by sharing with you why I feel like this is the beginning of the perfect storm, Folks. Right now, the mortgage industry is involved in a fantasy triage. Pretty soon, regardless of how much hope, change, and smoking mirrors that are used, the industry is going to flat-line. There will be no hiding of that. And THAT, my friends, will be your precursor to a complete financial collapse in which our U.S. currency isn’t worth the paper it’s printed on. When you hear the words that a company is “too big to fail” it translates clearly into “We are so entangled with this company that if it fails, the gig will be up and we’ll all have to go back to honest livings.” We have seen only the beginning of banks dropping like flies because their hands are tied with foreclosures now. They can’t recoup their costs, their bogus books won’t help them. They are literally committing financial Hara-kiri right now (none of this would have ever come to light had there not been so many foreclosures). We’ve created more currency in the last 18 months than we have in the last 200 years without any accountability or justification for that money to be created. So I ask you, are you beginning to see the writing on the wall? At the risk of sounding anything other than genuinely concerned, I beg you all to get out of debt and get prepared with your necessary supplies NOW while you’re money is still worth something.
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Thanks so much for the info-- I see it all so clearly now! No wonder no one is lending- I thought they were just being paranoid! you say get prepared, I have one question: Do you believe in buying silver and gold? If the dollar isn't going to be worth much is it still worth saving? I have one car payment as far as debt goes, no credit cards. I also have (other prep items).
Natalie, I'm not a big fan of gold and silver. I advocate getting what you need now that you might need gold and silver for later. The only exception to that in my life is that I have purchased a bit of the Susan B. Anthony dollars. There will come a time after the financial collapse that even gold and silver will be of little worth--not literally, of course, but keep in mind even gold and silver are only worth what they can buy. With a financial collapse, there's a whole 'other series of dominoes falling.
Kellene...don't know if you have heard much of how the modified home loans are being done but high risk people are being given new loans at less than 5% interest and having their homes recalibrated to the current market value (which could put these people upside down again in 6 months) and THEN the money that they have been upside down in their mortage is being put on the back side of the mortgage. S o if they sell or actually manage to pay off the loan they have a balloon payment due of the outstanding amount of the original price they paid a few years ago. Hmmm....how do you think this is going to end....not well I am sure adding MORE to the mess....
Joann, thanks for your astute observation. Actually, that's only partially accurate--it's even worse because when the amount is put on the backside, it's permitted to collect compounded interest from the day it went delinquent AND it will be paid down LAST.
Based on the info that I've provided thus far, perhaps you can see why some folks who don't have a whole lot of equity in their homes are being approved for those kinds of loans. They also have to meet the criteria as being very motivated. They are only considered "high risk" because of their circumstantial credit history, whereas they are having to prove up, down, back, and forth that they will be able to make the payments. And the only reason why they are getting the deal is because the bank can't make enough between the resale of the house plus profits from the bailouts. 5% is nothing compared to having to go belly up. They are giving the loans in hope that the homeowners can pay until the market turns around again and the property gains equity once again. Oh yeah, we're in for all kinds of fun now. :-(
Great post Kellene! Rarely do you find such a simple to understand description of the whole mess.
Have just found you and think that you are a remarkable multi-faceted lady. Great job on keeping us thinking in so many areas!!
Awww...you're making me blush! Glad to have you with us Urania!
Excellent! Our prayers are with you as you continue to enlighten, encourage, prod and poke. Keep up the excellent service that you are doing for those who have ears to hear.
Wow Kellene you got Instapundit. I knew you were the bomb it's nice when others recoognize it.
What the heck is "instapundit?"
I have what money I have in the bank in CDs and in a passbood savings account since it is backed by "the full faith and credit of the U.S. Government(Us)." Where can a person put their savings that will be sort of safe? I can't see a place for our savings that will be there. I have been buying food and other preparedness items, but I don't have enough room to store much more. Any ideas?
Randy, this is where your Spiritual Preparedness comes in. That's a really personal question as it will only apply to you and your situation. If you've got everything else covered, then I would then invest in gold, ammo, etc. However, if you've still got room to go, then I'd get serious about having an alternative place for goods. It could be a trusted friend, a family member, or a second home for an alternative place to thrive in the event of a serious challenge. I personally would never put any subsequent amount of money in a bank CD or savings account. Even with as comfortable as I am in terms of preparedness supplies, there would still be ways for me to be more comfortable, more secure, and able to help more people if necessary. Good luck with your decision. I hope I was able to help just a little bit. But ultimately, this kind of decision has to go with what your gut is telling you. Keep in mind that Mental Preparedness affects those decisions as well, so perhaps you need to do some focused fact finding.
First of all how in the heck do you know all this stuff!?! You don't have to answer I know your awsome. I do have a question like Randy's above. I keep buying Supplies of food and other neccessary and useful items. I don't invest money, otherwise. So you recommed paying off the mortgage in this article. Is that more important, in your opinion, to put all extra money into paying off the mortgage asap rather than continuing to gather supplies?
Clarice, I spent a long time in international finance in my "past life"--before I decided to do what I really wanted to do--preparedness education and practice. It doesn't pay as well, but it's a bit less cut-throat and controversial. :-)
Ok. Keep in mind that there is prioritization in preparedness. This article falls into the Financial Preparedness category, which makes it number 9 out of 10 in order of prioritization. You can do a search on the "10 Areas of Preparedness" on this site. I go over the priorities.
One step at a time, Clarice.
Instapundit, a primarily political blog authored by Glenn Reynolds, is one of the top blog sites on the Web today. An affluent, well-educated, mostly male audience regularly spends time at the site.
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I can't garuntee it's the same Glenn Reynolds but I know he's been covering some preparedness ideas.
Hm... Cool. Thanks for the info :-)
Glad someone asked how you know all this stuff as I wondered too! The question I have left is what's the risk of those of us with mortgages and other debt? My wife and I stopped borrowing and quit using credit cards almost 2 years ago. We went through Dave Ramsey's Financial Peace course and have been paying off debt as best we can. However, it'll take us years to get it all gone. So what happens to us with credit card, vehicle, and mortgage loans if all this goes south? We're current on everything and both have decent jobs.
I don't know how much time you have left to prepare. Look at Kellene's top ten on preparing. Most steps are pretty cheap and you need them.
I would leave the mortgage for last if you have a 15-30 year fix rate. Pay of all credit cards, then auto loans and signature loans, then Mortgages.
Then look at your budget, You don't have a budget then make one. Is this easy "Hell no"! It takes a lot of work. Is it doable for anyone? Yes, it can be done at anytime. Gosh knows I played the game. I got caught when I got sick. I won't put myself in that position again. Yes I'm paying off my parents that bailed me out.
All debt is bad. Free yourself
This forclosure crisis is huge. We are talking a possibility of the contracts and "notes" being shredded and recreated electronically.
Now if you "Tear up a contract" It means it's null and void. If I shred my Mortgage paper work and not pay. I should be kicked out of my home. I have voided the mortgage contract. I have violated the contract. But if a Bank does the same thing? If the papertrail of Title is gone/toast. Do I owe a mortgage note? Now I'm not behind on my payments. I bought my house at a set price, payments and I expect to pay it off in so many years by contract. Now the bank may have shredded that morgage. Do I still owe them payments when they "tore up the contract"?
It will be interesting to see how the feds and the banking industry works this out.
Jamie, while I am not the one to answer whether or not you "owe money" to someone, I will say this. A company who is not the lien holder cannot foreclose on you. They must have the original note. (See the article for better clarification, I like how I wrote it better in that. :-) )
Oh I agree Kellene I bought my house at a fair market price. I put 10% down and did the mortgage. I have made my payments on time. Though I had a bit of problem with Wells Fargo, but got clear of them and into a VA loan. My home is worth the cost I have to pay to live in it. I make my payments. My moral dilemma comes not if I can make the payments. Should I make make the payments if the original loan and note is destroyed. Of course this a game of what ifs. I'm up to date in paying my debts. If my home looses value that's no one fault, it's just the market. If I buy gold today at $1300 + per oz and in a day or 2 it drops to $800.00 per oz. that's just the market. Same for a house.
I don't mind being held accountable for my debts. I wonder if the big banks will do the same?
I think we've seen plenty of evidence that accountability and banks do not go well together.
Why in God's name would you want to 'get out of debt'? Now is the time to get all the cash (equity) out of your home - take a reverse mortgage - Get in debt!!!!!! if you are qualified. Convert the cash to silver and other commodities...not necessarily gold. Silver is better.
I've been in the mortgage biz for years....So far I've predicted every major collapse in the market and money.... for years.
The dollar within the next year or two is heading for collapse. Much sooner than anyone expects...... $0.10/$1.00 - I say ten cents and my friends as RBC see twentyfive cents per dollar.
So..... Get your cash out - convert it to stable commodities.... Pay your loan back with the "inflated dollars" - at a fraction of what it cost you - Make sure you get a "fixed' rate loan. 30 yr preferable.... pennys on the dollar!!!!
Ladies and Gentlemen,
I give to you "Exhibit A" for your consideration.