SHILLER: Principal Must be Written Down for Economic Recovery

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Editor’s Comment:  

We are looking into the abyss of economic failure. For economists, the people who know the facts, the ONLY answer left on the table is principal correction or principal reduction. We have tried everything else.

The reason is very simple. The Banks created a market where prices soared above values and like any other situation where there is a false spike in prices over values, the correction needs to be made. The free market has already arrived at the same conclusion —- nobody wants those mortgages even if they were valid and enforceable. The refusal to rush toward principal reduction is putting the banks in an all or nothing position. The market and the economists have spoken — if that is the choice the banks will get nothing.

But the word from the banks is that we can’t have principal reduction. The real reason is that their balance sheets will be wrecked by forcing them to admit that those assets they are reporting are pure fiction — an inevitable consequence of bank excess finally recognized by the rating agencies last week. But the banks are spinning the myth that if principal reduction (in other words REALITY) prevails then everyone will want to do it. Assuming that is true, why not?  Shouldn’t everyone want reality? The Banks have had their windfall, they have been paid enough to pay back the investor lenders, and they are driving the economy into a ditch with their unrelenting death grip on the purse strings. 

Americans must decide between the Iceland model in which their economy quickly recovered, and the American model where we continue to languish with no real prospects for recovery. The European attempt at austerity drove them further over the brink. In fact, every policy is now debunked that ignores the realities of the market place and the reality of the importance of the housing market in ANY economic recovery. There is only one thing left. It is the right thing to do.

We have exhausted every idea except for doing the right thing. Restore homes to people who were unlawfully and fraudulently induced into signing papers that never even recited the terms of repayment as it was recited to the real lenders and which never disclosed the multiple borrowers on each loan, most of whom were hidden from the borrowers. Write down the mortgages just as the banks have already done, as confirmed by trading in the marketplace. What is so difficult to accept here?

People get windfalls all the time when bullies take over markets. And yes many homeowners will want the benefits of a write-down that the rest of the world already accepts as true and necessary. The result will restore wealth and power to the middle class, revive the economy and restore our prospects. We will have the resources to repair our ailing infrastructure (an embarrassment to world traveling Americans), invest in education and job training, invest in innovation and get back some of that pride we once had in America.

The only people stopping this are those who are pandering to extremists who would rather see the Country collapse than to allow a “handout” to those undeserving deadbeat homeowners. The facts and reality leave them unpersuaded because fanning the flames of ideology is how many politicians achieve power and maintain it.

Like I said last week. It comes down to this: country or chaos. What is your choice?

Robert Shiller: Lenders Need To Write Down Mortgages To Solve America’s Housing Problem

By Mamta Badkar

Yale economist Robert Shiller says the housing crisis is a collective action problem.

This means, he argues in a New York Times editorial, that if all mortgage lenders were to act collectively and write down what was owed to them by individual homeowners everyone would be better off.

Shiller offers a few types of collective action to write down mortgage principles. One involves giving “community-based, government-appointed trustees a central role” in writing down mortgages, any idea proposed by Yale economist John Geanakoplos and Boston University law professor Susan P. Koniak.

Another proposed by Robert C. Hockett involves “eminent domain” which allows government to seize property with fair compensation to owners when it is done in public interest—and could apply to mortgages:

Professor Hockett argues that a government, whether federal, state or local, can start doing just this right now, using large databases of information about mortgage pools and homeowner credit scores. After a market analysis, it seizes the mortgages. Then it can pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.”

People are more likely to default on their mortgage when it is underwater i.e. when their homes are worth less than their mortgage. And  lenders lose money on foreclosures because of lower home values and legal costs. So it would be in everyone’s best interest according to Shiller if mortgage lenders were to take some such collective action.

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26 Responses

  1. […] Read more… Posted in Banks, MERS, News Around The Country, States « Old Republic and Foreclosure Legality Updates; CA Homeowner Bill of Rights Nears Vote; Lots of Training and Education News State of Washington Foreclosure Resource Links » You can leave a response, or trackback from your own site. […]

  2. but…but…the governments are NOT broke. It’s more lies. They have been investing our tax dollars for decades and they’ve got trillions of dollars. Look, you can’t take the government’s word for anything!

    Do a web search for Walter Burien’s expose on the CAFR, the Comprehensive Annual Financial Report. It explains how the gov is able to make it look like they’re broke by keeping a double set of books. One set with the real info is kept secret from the public.

  3. @ usedkarguy

    Can you explain a bit? “File a Chapter 7 and then convert to a 13 and watch them squirm when you file your objection to their claim”

    Is it better to file it this way? More paperwork (meaning more fraudulent documents to make) for them? Why convert???

    THANKS – from Non-judicial GA!

  4. @hkcon,

    I stand corrected. Pete Rose was a hell of a good player, I’ll say that much. And I saw him on the 60 minutes he did about 10 years ago: I still didn’t know exactly what he was accused of. I just used his name to make a point. it wasn’t my intention to mar anyone’s reputation and, quite frankly, i really don’t know what he did or didn’t do.

    The guy looked like a nice guy on TV. Can’t say that about Jamie boy or the Stumpf… So, you’re probably right. And i expect anyway that his intentions were not to take control of 7 billion people and destroy the planet.

  5. I think now that some cities are filing bankruptcy, “soon to be followed by states as their pension bombs explode” we should start a movement for the federal government to declare itself insolvent, and file bankruptcy.
    This is the way to screw the mega rich bastards of the FED who are puppets for the Rothschild’s, owners of what is known as the Military Industrial Complex, Bank of England and overlords of fiat currencies and gold.

  6. @Enraged…this is a little thing but as a huge Pete Rose fan I have to set the record straight…Pete Rose never bet AGAINST his own team…in fact he never bet on his own team to win or lose, he bet on other games that he could not influence and he has paid a huge price for it…much more than the cheaters who juice up and take records…sorry for the off topic post but I couldn’t stop myself!!!

  7. At last someone with balls… but if I were he, i’d be disavowing that Rand son of mine in a jiffy! I might even ask for a paternity test.

    100% CONFIRMED: Ron Paul Will Not Endorse Mitt Romney
    Published June 21, 2012
    Grant J. Kidney — During a recent interview with CNN’s Wolf Blitzer, libertarian Ron Paul confirmed that he will not be endorsing Mitt Romney for President of the United States.

    Just weeks ago, Ron’s son Rand came out in full support of Mitt Romney leading many in the liberty movement to feel betrayed. However, since the dust has settled, it is clear what folks like Lew Rockwell have been stressing all along- that Rand is certainly not his father.

    “Well, it looks like he (Romney) has the delegates, yes. But he doesn’t have the control of the hearts and the minds of the people.” Stated Ron Paul to Wolf Blitzer. “And right now a lot of people – a lot of delegates who are pledged to vote for Romney are actually very strong supporters of ours and will be strongly supporting us when we want to put things into the platform that say, hey, we don’t need another war. Yes, we do need to audit the Federal Reserve. Yes, we ought to really cut spending.”

    “Your son, Senator Rand Paul, has endorsed Romney. I take it you’re not yet ready yourself to endorse Romney, are you?” asked Blitzer of the 76 year old libertarian. “No. Not ready. No way.” responded Paul.

  8. Yeah, but there’s an eminent vote on Audit The Fed…things are going to come crashing down when the people who’ve been defrauded see where all the stolen money went–to bail out foreign banks!!!

    There is no better definition or example of psychopathic behavior than the Fed’s throwing taxpayers under the wheels for traction while driving the stuck economy off the cliff. Some people are gonna be mad enough to block their fire sale purchase of EVERYTHING in existence, and repeal the Federal Reserve Act.

    We labor, struggle and starve only to wind up homeless and unable to collect on the social security taken from our checks to provide for our old age needs, while the government which is supposed to serve us invests our tax dollars for trillions in profit that they hide from us, crying poor mouth. When will we stop whining and get on our hind legs? I’m guessing it’ll be when we see that Audit stating that the Fed, which is a privately owned bank that claims it acts in the interests of the taxpayers, made unauthorized loans to prop up their foreign buddies in other central banks ! It’s not looking good for the Fed. They’ve NEVER been forced to open their books and give an accounting of what they did with our tax dollars before. I believe I hear the death knell tinkling in the background.

  9. And Pete Rose went to jail for betting against his team. The guy learned it on WS!

  10. WOW—-so this is how they did it. Sure they should look at the ones who turned a blind eye—but I hardly feel sorry for this one. Seems like they cant find the money—-it should be basic that every thief large or small gives the money to the govt for further enforcement and maybe to foreclosure defense non-profits. That is a better way to get at the facts more broadly—and force writedowns by settlement.

    The earth shook this afternoon when the ratings agencies wrote down Germany’s credit rating——–because it might have guaranteed Spain italy debt during the 3 day summit to save the world from global depression the next three days. This seems likely to limit Germany’s domestic support for any sort of bailouts for spain etc. default? at this point it would be nice to know what Chase’s $62 trillion in bets are?

    Did they bet the world would go into a depression–or the opposite?

    If they bet that much money on any positions—arent they likely to try to influence the outcome? To “fix” the bet? Wouldnt that be a crime against humanity if the bet was that the globe goes into depression–and then they take steps to assure the outcome? and wouldnt that be a great opportunity to buy up everything at distress prices? What is the point of having a lot of cash piled up if it cant be used to buy things at distress prices—best of all worlds for Chase—a govt willing to lend it unlimited money at zero interest rate—-trigger a catastrophe–then buy buy buy—–there are still some piggy banks out there that they can get into and clean out–doing God’s work as Goldfein declared.

    This is the ultimate goal of capitalism —a tiny handful that owns everything and collects all profits–with no competition–no regulation.Every corporate economist’s dream !!!!

  11. Nice to hear the confidence after such a long haul usedkarguy. Kick their asses back to Wall Street.

  12. carie, I’m in Wisconsin, a judicial AND lien theory state. As owners, we HOLD title in law and in equity. Foreclosure is a suit to prove a lien. Got ’em!

  13. I’m sorry but principal write-downs are too little to late. Principal write-offs are the only ways since we paid for the damn house hand over fist at the expense of our kids, future grand kids and great grand kids.

  14. Better than principal reduction would be the reduction of the banking fraudster principles who created the bogus inflated mortgage schemes and their aftermath. Here a lowly mortgage woman gets life-imprisonment for a few dozen such frauds, yet gangsters like Morgan’s J. Demon, and thousands have paid off law enforcement to make sure they don’t get prosecuted… http://www.ca9.uscourts.gov/datastore/opinions/2011/10/19/10-50051.pdf

  15. @usedkarguy—I forgot—are you in non-judicial?

  16. I think anybody who can file bankruptcy SHOULD, and then march in with an objection to the secured claim. File a Chapter 7 and then convert to a 13 and watch them squirm when you file your objection to their claim. Force their hand. The more lies and fraudulent documents they propound on the court, the greater the chance of sanctions and damages and attorneys fees. Kick these fuckers to the curb! The judges are waking up. Get in front of a BK court and see what the banks do then. Catch them lying and committing fraud, and THEY’RE OUT! I personally can’t wait for my evidentiary hearing next month. FIGHT THEM WHERE YOU HAVE AN EVEN PLAYING FIELD. IT’S NOT IN THE CIRCUIT COURTS, IT’S IN FEDERAL COURT. The bank attorneys have committed themselves to pursuing false claims. Make them prove THEIR case, not the other way around. They will certainly try to force YOU to prove their claim is unwarranted. So be it. I have the evidence; they have faulty assignments, liabilities under the law, and unclean hands.

  17. article in American Banker. S Corporations are more profitable for banks

  18. It’s more than just the tax advantages that boosts returns for investors in banks classified as S corporations—they appear to be fundamentally more profitable than their C corp counterparts.

    The return on assets at the median S corp has consistently outdistanced the median for C corps by a wide margin over the past six years, even after adjusting earnings for S corps as though they paid corporate taxes, according to data from SNL Financial. In 2011, the median was 0.89 percent for S corps and 0.58 percent for C corps. (Unadjusted, the median for the S corps was 1.13 percent.)

    The median return on equity for the S corps also consistently beat the median for C corps by a large gap, while median leverage, as measured by equity to assets ratios, was roughly on par between the two groups. (Institutions considered here had less than $500 million of assets at yearend and did not change their tax status between 2006 and 2011.)

    S corps are entities with fewer than 100 shareholders that elect to pass their tax liabilities through to their owners, avoiding the double taxation of income that applies to ordinary C corps.

    There is no reason that S corp status should translate into better fundamental performance, but perhaps smaller ownership groups tend to demand more from executives. Or perhaps executives at S corps are more likely to have big ownership stakes themselves.

  19. ANOTHER BANK LOOPHOLE !!!! —-So lets guess who the concentrated ownership described ——offshore hedge funds of course—–pretty easy to avoid paying taxes at all –anywhere.

    And lets guess–how could the bank controlled by offshore hedge funds rathcet up profits—maybe by ignoring all rules and regulations? since the owners are sitting outside the US —-pretty hard to even talk to them much less investigate ownership links to say credit bidders picking up sweet deals?

    The sky is the limit–or rather there is no depth that these guys cannot plunge to pick up a few bucks—preservers dont get paid–in exchange for salvage rights —furniture in unsuspecting homeowner homes? Anything worth stealing—–why do we assume when they clean out a neighbors house—that it is an accident? –its a perfect excuse—maybe thats why so many preservers have criminal record? A servicer authorized license to steal–this creates opportunities —only in America—and Nigeria —

  20. It is not just about homes–although that becomes increasingly important as the prospects of pensions, social security benefits and health benefits, long promised and paid for, dim. State, local and federal government seems to have no problem about reneging on promises to employees and public about pensions, so why should it be such an immoral proposition to write down a mortgage to the actual value to which a house has declined as a result of bank chicanery.

    equally importantly for younger people is the shriking employment opportunity. Middle-aged workers are shackled to their underwater homes through no fault of their own. These homes may not be in default—-but if either of the worker-owner couples are laid off, sicken or otherwise face a setback—they cannot pull up stakes and leave to find better employment opportunities. This is a great advantage for regular employers—-employees that cannot seek alternative higher paying work elsewhere. this is indentured servitude–no other description fits. Thus wages stagnate—US austerity by default. Even if the economy rebounds–the numbers of eligible home buyers are not going to rebound –1/5 at least are not credit-worthy. Thus the prices of homes will not rebound–especially in the face of rising interest rates–yes not operation twist while lowering govt 30 year debt service cost is actually driving up shorter rates–a sign of things to come. The situation is only going to worsen–vast swaths of US citizens are trapped in increasingly below water homes–virtual slaves indefinitely to current employers.

  21. I think we should fire AT DeMarco, along with the other bankers in front of a firing squad. Then they’ll realize what a mistake it was to lobby for our loss of civil liberties and bring an end to due process. Ooopsy! Let them enjoy a butt full of lead, since Obama has said he can shoot anybody he wants without a trial. It’d be great election year theatre. Bet we could sell a lot of tickets to see that!~

    Not much in favor of the “eminent domain” idea. Government has no business being the people’s realtor, because they have proven that they can’t be trusted. We need to stop relying on government to solve issues that can be solved by applying the laws that are on the books, and cleaning out the corruption from our legal system.

  22. Before anything is written down or reduced for anyone don’t you think a more important issue is finding out who truly owns the notes,mortgages and so forth.How can this take place when no one truly knows who owns the note.How can you make a contractual agreement with someone when they don’t own the note.I think it is important that mortgages be written down for under water property owners but if you make an agreement with someone who doesn’t own the debt how can this agreement be valid?Lets find out first and get this straightened out and then move ahead.

  23. What do you mean by lenders

    Who are these lenders who will make principal reductions. If you pretend you’re a lender does your beneficence have any legal effect? Can you give away what you don’t own?

  24. FIRE DeMarco !
    Tar and Feather the banksters. !

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