Dead Pledgers: Is Home Ownership a Fraud?


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EDITOR’S COMMENT: I agree with the main point of this article by Shedlock (see below) — that home-ownership in this country has morphed into a disguised rental, using the banks as middlemen. I disagree that providing restitution to borrowers who were defrauded by false appraisals and false representations about the loans is a “bailout”. Anyone who is the victim of fraud should be compensated by the party committing the fraud. That isn’t a bailout. As for the conclusions reached about Ron Paul, the Federal Reserve and the GSE’s, I think he might be throwing the baby out with the bathwater.

The fact that the mortgage process was abused beyond recognition is not a reason to stop the mortgage process, nor home-ownership. If a murderer uses a knife we put the murderer on trial not the knife and we don’t ban knives.

But the fact remains that the manner in which mortgages were originated for the last 20 years has been distorted and convoluted with little regard to economic reality. The financial industry has enslaved us with debt by selling the appealing prospect of payments without reinforcing the overall price of what you are buying, whether it is a home, TV, furniture or a car. Young people seeking financing for the their education are routinely told by the private sector that they need to borrow more for expenses. In each and every case, the consumer is not advised as to what his balance sheet and income statement will look like when the bill comes.

Renting money (i.e., taking a mortgage loan) is, in the final analysis, renting your own house and giving an extra profit to the middlemen. But it is not intrinsically wrong or evil. The reason we now have a Consumer Financial Protection agency and the reason why we have the under-utilized Truth in Lending law is that it has already  been determined and accepted that financial institutions will do whatever it takes to make a profit and that the loan must be accompanied by full disclosure giving the consumer the opportunity to exercise his or her freedom of choice thus increasing competition in the marketplace.

Our education system completely ignores personal finance. At the same time the disclosure requirements have been ignored and distorted by pretender lenders and true lenders alike. If you need to lie or distract someone in order to get them to take your loan product then the likelihood is that the buyer of the loan product will live to regret it while you start howling about deadbeat borrowers.

That is why I write this blog, why I have posted so many resources in the forms section, and why it became necessary to offer the services of analysts who would could untangle the facts out of the wreckage of what appeared to be a vibrant economy and housing market when in truth it was layering a system of debt that bears striking similarities to slavery. An educated consumer is the worst enemy of the Banks who participated in the false securitization scheme that led to this disaster.


MIKE “MISH” SHEDLOCK, Global Economic Trend Analysis

Every week someone sends me an idea on how to fix various housing problems.

Many want home prices to stop falling and many others want to bail out homeowners because banks were bailed out (as if two wrongs make a right). Others want to stop foreclosures even though the very best thing for most of the people in trouble would be to shed the albatross by walking away.

The one thing they all have in common is a misguided proposal to bailout someone at the expense of someone else (typically the government but few figure out the government means taxpayers).

I have long-stated the best thing to do is nothing. Indeed if nothing is done, home prices will drop low enough that investors will want to buy them. Delays in foreclosures only serve to delay the housing recovery.

Fixing the “Un-Real Estate Mess”

Last week I received a different kind of proposal that merits a much closer look than all of the various bailout proposals I have seen to date.

My friend “BC” writes …

Hello Mish

The only long-term durable solution to the unreal estate mess is to cease further securitization by agencies and shut them down.

It’s time to concede that “homeownership” is a fraud.

When there is $16 trillion in mortgage and consumer debt outstanding and an estimated $16 trillion in residential unreal estate value, with the risk of another 20% decline in prices, there is no “ownership”.

Rather, virtually everyone with a mortgage is renting debt-money from a lender and leasing the land from a local taxing authority. The mortgagees have a “dead pledge” in the value of the debt owed, not an “asset”. The lenders and taxing authorities are the “owners” of a lien (a bond or constraint on the real property), which entitles them to income in the form of compounding interest and tax receipts in perpetuity. 

Unreal estate is the best investment for lenders and taxing authorities, not dead-pledgers.

The value of an unreal estate loan should not exceed the householder’s income and should be 100% collateralized by an asset or funds other than the property.

If someone wants to mortgage a house, and his household income is $50,000 (around the current US median household income), he should not be lent more than $50,000, and he should have at least that much in collateral in order to qualify for a “dead pledge”.

That way, the debt is self-liquidating. Terms should be no more than 10 years.

By the way, this system was generally the norm for centuries before the period after WW II. We assume that what has been the norm in our lifetimes is the only way it should be or can be. We have the colossal mess because we have allowed ourselves to be taken over by the rentier mentality, which always leads in the extreme to unserviceable debts, extreme wealth and income concentration, and economic and social crises and collapse.

A further decline of 15-20% in residential unreal estate values will mean a complete wipeout of all US household net wealth/equity of the bottom 90% in terms of mortgage debt and consumer credit outstanding. In effect, 270 million or more Americans are already renters or neo-feudal peasants “bound to the land” by mortgage and consumer debt and the tax code.

It is appalling and obscene that we assume as a normative condition spending 5-6 times the perceived market value (debt-based value) of a house over a lifetime when costs of principal, interest, taxes, and maintenance/improvements are included, whereas the rentiers have little or no accompanying social obligations to support public infrastructure required for productive enterprise.

Worse yet, in the process of favoring and enabling the rentier domination, we punitively tax labor, production, productive capital investment, savings, and productive capital accumulation while encouraging rentier speculation, waste, ecological degradation, and resource depletion.

Increasing non-productive rentier gains to the top 0.1-0.4% of US households have resulted in deindustrialization, militarization, financialization, hopeless indebtedness, obscene wealth and income concentration, and the gutting of the productive capacity of the US economy.

Banks should not be permitted to take a $1 deposit, set aside $0.03 in reserve, and then lend $1 at a 7-10%/yr. growth rate and then go broke and have to be recapitalized by the central bank and government borrowing every 9-11 years when compounding interest burden exceeds labor product growth.

Banks should be required to collateralize all loans at 100%; that is, only be allowed to lend their own money, not depositors’ money. However, banks should be allowed to charge whatever they like for custodial services.

Banking should not be permitted to make money from making money and thus encourage wider use of increasing leverage to capture eventually all net after-tax real labor product for a generation, leaving labor incapable of sustaining itself after taxes and debt service.

Of course, all of this would mean effectively returning to something like a Victorian-era banking standard, which no rentier, politician, or most of the public will accept.

My friend “HB” replied to “BC” …

I absolutely agree, except I would also allow banks to be middlemen between savers and borrowers, i.e., allow them to lend out savings that have a fixed term for a corresponding fixed term. That way no new deposit money would be created.

Libertarian Approach

Under the conditions outlined above, home prices would be very stable.

Some might question how that would fit in with a libertarian approach. I have an answer: In a free market there would not be a Fannie Mae, a Freddie Mac, a HUD, or an FHA. More importantly, fractional reserve lending would be outlawed as fraud, and there would be no Fed.

Perhaps some lenders would be willing to make loans longer than 10 years, but not many. I would not stop those who did. Rather than a set of rules that “BC” proposed, a free market left on its own accord would gravitate to a set of workable procedures, probably very close to what “BC” suggested.

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9 Responses

  1. the American people are realizing that the game has been rigged; as evidenced by the rate of strategic defaults among the jumbo borrowers. All those people with “prime credit” who are now severely underwater are making the prudent decision to stop paying, fight the bank, and recoup your losses that way. Save enough cash, you won’t need “credit”. Enough is enough.

  2. @neidermeyer

    “barely enough time to unpack and get some shrubs growing in the yard”

    I’ve got 50 year old trees, shrubs and fruit (orange) trees planted when I was a child. All kinds of owners losing homes now. No time or money ever spared on this landscape. They will throw me out on the street and leave it vacant and let the garden die without blinking an eye (lots like that in the neighborhood now).

    There is a lot of judgment about people who borrowed against equity in their homes. My parents lived out long days here (high cost of living area) because they could borrow. They essentially purchased the home over and over again always at a low ltv. Those funds fuelled jobs ultimately. It was a toxic product that did me in combined with other financial surprises and setbacks happening at the same time as has happened to everyone. Now lower ltv underwater because of drop of more than 50%. Peak was 2005. Value is comparable to 15 years ago. Values here have never gone down. Stayed flat in the 80’s – no big deal.

  3. Opinion.
    It’s not a bail out and it is.
    Why do I say that?
    Well they banks will say they are “too big to fail” if they have to pay the people they defrauded, and if the taxpayers have to keep the bank afloat so they can pay the people they robbed, well we’ll be pay out of our right pocket into the bailout and receiving the settlement in our left pocket.

    Where is all that money? There is a balance sheet holding that information and it’s not being revealed…where is the money…where is the money…where is the money…how can someone make $9 million dollars on a $500,000 and can’t even give the homeowner they stole from $500,000 plus interest, plus basis for improvements and sweat equity and upkeep of the home that that was stolen?

    Where is the money? All this time, no one asks, but they sure know how to give them more, and the sure believe the banks when they want to give someone they robbed $2000 for the

    Trespass Unwanted, corporeal, life, free and independent state, jure divino, in jure proprio

  4. Growing up my family moved every 1.5 to 3 years ,, barely enough time to unpack and get some shrubs growing in the yard ,, we always “bought” as my fathers employer ( IBM aka “I’ve been moved” ) helped with selling the property on each move .. obviously this was no more than renting in actuality as you can’t pay off a property that quickly.

    I see nothing wrong with fractional reserve banking or securitization ,, as long as the assetts are marked to true value on a yearly basis (if held as assetts) and there is a hard cutoff on fractional reserves that is adhered to… selling off loans to FRE or FNM is OK too as long as they verify underwriting standards… What’s not OK is tying currency creation to debt .. The government should create currency directly and tie it to a reliable economic yardstick..

    We’re heading toward a long weird path through this “recovery” we’re just as sick as Europe ,, our dollar will remain strong choking off our exports.. our “leaders” are going to bail “us” out by bailing out the EU via a German bailout… I see both high inflation (food fuel etc.) today and higher (or even hyper) inflation in the future followed by a great deflation and a economy where barter is the norm..

    Is it too late? maybe we can still save the USA with radical surgery… we need a leader who doesn’t follow polls … What’s needed is known to all …

  5. “we don’t ban knives.”

    I do not think the analogy is apt. Home ownership via S&L’s —–or even remarkets mortgage notes with a govt guarantee to retain fixed rate financing worked for decades. Fixed rate govt stability interest rates are necessary to predict future costs–especially as we look into rising inflation. Which was announced today BTW.

    That means after election interest rates are going to jump people–ARMs do not work–4 option or any other.

    You need FREDDIE AND FANNIE to provide stabilty–not exploding loans.

    People lost sight of that as they tried to give huge pay plans to essentially numb-above the neck bureacrates that PRETENDED they were private financiers. Pretensions pretty much only existed on paydays–rest of the time they were FUBAR morons–not fit to work a tellers window.

    No defined mission–except maximize personal paychecks. Newt told em so. But they paid him to conflict him so he couldnt spread the word.

    WE DO BAN AUTOMATIC ASSAULT WEAPONS. That is more analogous to lickety split securitizations of predatory loans misrepresented to investors–that is what must be banned. and no reason the ban cannot be applied retroactively–because it was banned then–it just must be enforced agressively.

  6. “Of course, all of this would mean effectively returning to something like a Victorian-era banking standard, which no rentier, politician, or most of the public will accept.”

    They might if a few solutions other than nothing were offered.
    What do you do with the schlumps who bought into the “rentier domination” – pretty much everyone for the last 100 years including some who are 100 years old now who “borrowed” (liqudated? rented?) their only “asset” many times over in order to live out their days with quality of life (instead of warehoused, tied up and tubed which costs even more)? They didn’t break any laws. They just paid their “rent” on time until they couldn’t pay anymore.

    Or the schlumps who aren’t even dry behind the ears and already owe the rentiers a few times the family home? They didn’t break any laws either. Debtors fueled the economy – they created jobs as in they bought things with “borrowed” money. Right now debtors gone, jobs gone. New paradigm is make things – buy things. Who will make the things and who will buy the things?

    What about right now? Throw everyone on the junk heap with their possessions and bulldoze it to oblivion? Who would be left standing? It would solve the world population problem and global warming perhaps.

    As you point out everyone is broke if truth be told even the rentiers. So what now? Maybe we should just bankrupt all the debts including the houses. It was an illusion wasn’t it?

  7. OK, why stop there. I will run for President and you will all vote for me. Under an executive order – I will freeze all wages and pricing. i will eliminate every worthless agency that exists merely to create jobs for votes. I will automate the entire Country and eliminate the Federal Reserve Corp and every level of government aside from Federal for naval, human rights and mail and leave only State and County Government. I will eliminate the thousands of school districts and put the over-paid supers out on their butts. I will force States to modernize assessment systems and finally:

    I will roll back all product, wages and realty prices to 1912 levels. We will start manufacturing again with new banks. The old banks and the federal reserve corp will be abolished and our new currency will be based on land value, whereby no loans can exceed 10 years, all student loans and mortgages will be reduced to reflect the new currency value. I will strip the officers of every bank, that took part in this action of all their assets and use the new found wealth to pay off our debtors.

    This will all take about a week for me to clear up so I will need peace and quiet during that week. Oh wait, i have to run it by Newt first, he saved us all many times and the Country would not be here if not for him. Thank you Newt, you are the best!

  8. […] Read this article: Dead Pledgers: Is Home Ownership a Fraud? […]

  9. I made a ‘dead pledge’ with MortgateIT, Inc. who is dead, Fannie Mae who is dead, and my servicer is Wells Fargo who dead (bailed out). BTW the mortgage broker is dead as is the title agent.

    I outlived them with perfect credit and no default until they came back to life as Zombie Banks and now I am the Walking Dead walking away from it all.

    Some people want to buy/mortgage a house to have the intrinsic, emotional benefits of ownership (ie being able to make changes etc). There is nothing wrong with that. The drop in values and rough economy makes us rethink everything.

    Going forward I think the best idea is to rent and/or if you can buy a smaller or less fancy house for cash or with high downpayment and 15 yr loan. The idea being to free yourself from banks as fast as possible. I wish I had done that but hindsight is 20/20.

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