Up in Price but Not in Value—The coming collapse of the housing market and the intersection with securities and foreclosures

They paid the homeowner to acknowledge the existence of a fictitious loan transaction so that the investment bank could sell securities that were unrelated to ownership of the “loan.”
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That money is far from cheap. It will take everything you have and more.
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For 140 years since data was compiled about this subject, the most reliable indicator of housing value came from a simple proposition: median income ultimately determines value because median income determines what people can pay. Since the 1970’s when credit cards and other forms of debt products saturated the marketplace, median income has stagnated as people started carrying more and more debt. The availability of credit replaced the availability of a living wage. The increase in debt, combined with new “indispensable services” like cell, cable, and IT subscriptions further reduced the effective median income of nearly all households. Taken from that perspective, median income has actually suffered a precipitous decline buoyed only by the continuing availability of credit. Any student of history will tell you that is a bubble that will burst.
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According to the bureau of labor statistics, the median income in the U.S. in 2019, before the pandemic, was $68,703, Now it is lower at least temporarily because of the effects of COVID19. But home prices continue to escalate because the marketplace continues to be flooded with what appears to be cheap money because Wall Street investment banks are making fortunes on deals that are concealed from homeowners.  That money is far from cheap. It will take everything you have and more.
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According to Federal guidelines, a transaction labeled as a loan is only viable if the payments do not exceed 31% of household income. So do the math. $68,703 per year is $5,725.25 per month. 31% percent of that is $1774.83 — the maximum amount that the household can safely afford to pay for a mortgage payment. The average 30 year fixed rate is 4%. So that payment could service a maximum “loan” product of around $360,000. And that is how a house zooms up in price but not in value.
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The problem with those computations is that they are riddled with fallacies and lies. It assumes that gross income can be measured by the wages of the household when the first dollars the can be spent on living are now around 20% less than gross income. So the real viability equation would reflect median household income to be around $4600 — a figure to which virtually every wage earner in America can attest. That in turn reduces the highest servicing payment for a “mortgage” payment to be reduced to $1426. So a “conforming” so-called loan is actually nonviable — despite the apparent compliance with Federal guidelines. In fact, that family can only afford a mortgage loan of around $280,000 but they have a $360,000 loan.
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Add to that the inflated appraisals based upon remote comparables or even fictitious comparables, and you have the recipe for disaster. So even if somehow this beleaguered family had been able to put 20% down they bought a house for around $450,000 with $360,000 indebtedness of which they can afford to service, at best, only $280,000. And the house in a distressed market will fall below the median income level because of the usual panic in a crisis.
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Since they were already underwater at the start of the deal, they will be wiped out when the foreclosures start — either directly by foreclosure or indirectly as the prices of homes come down relative to median income. The best they can hope for is a home worth less than $280,000 with a “debt” of $360,000 thus wiping out their down payment and all the equity they thought they had. Unlike commercial counterparts, they cannot cram down the amount of secured debt or walk away. They are stuck — and that is before they lose wages from additional losses in the pandemic or the next recession and layoffs.
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Meanwhile, the Wall Street investment bank that sold them that deal and who labeled it as a loan never intended and never allowed itself to be a lender who was required to conform to requirements in lending and consumer protection laws.  They paid the homeowner to acknowledge the existence of a fictitious loan transaction so that the investment bank could sell securities that were unrelated to ownership of the “loan.” They made at least $4.5 million on the deal with the homeowner (reported as $360,000).
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So in a rinse-repeat of 2008-2009, millions of homeowners will go into foreclosure, the economy will suffer from another recession, and the investment banks will be laughing all the way to their offshore piggy banks that now amount to many trillions of dollars siphoned out of U.S. households.
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This is all happening because very few people are even curious enough to learn what happened in the mortgage meltdown. You know what they say — “Those who do not learn from history are condemned to repeat it.” So if the last crash is any example, then a small percentage of homeowners faced with foreclosures will retain title and possession to their homes as just compensation for the securities scheme, while the rest lose their homes in legal proceedings that are falsely labeled as foreclosures.
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So why are Wall Street investment bankers giving out money on these terms? The answer is simple. first, they are making $4.5 million on the deal. Second, they are only paying a small fraction to the homeowner and they are luring the homeowner into a disguised deal that requires the homeowner to pay back the only compensation he/she ever received plus “interest.” It costs nothing for investment banks to get into this deal. No risk of loss. No risk of sanctions for violating lending laws because they never become lenders. No loan account receivable to charge off so nothing to report to shareholders about any losses arising from homeowners not making scheduled payments. Wouldn’t you do that deal if you were in the position of the investment bank?
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Nobody paid me to write this. I am self-funded, supported only by donations. My mission is to stop foreclosures and other collection efforts against homeowners and consumers without proof of loss. If you want to support this effort please click on this link and donate as much as you feel you can afford.

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Neil F Garfield, MBA, JD, 73, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.
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3 Responses

  1. Java is absolutely RIGHT about escrow accounts racket.

    Big Banks take ALL your money, not just down payments and repayments of commission mislabeled as “mortgage loan”.

    Your Escrow money are also pocketed by Big Banks.

    All Taxes – which are intentionally increased to create more profits for Big Banks ; and bogus insurances which are placed to create more hardship – are paid by either CoreLogic or Black Knight from Big Banks operating pools which consist of money collected from investors whom Big Banks sell derivatives.

    States do NOT demand fake “Trusts” to pay property transfer taxes after foreclosures – they shift this burden on defrauded homeowners whom they increase property taxes to enrich Big Banks.

    Fake “deficiencies” in escrow are fabricated by Big Banks via CoreLogic and Black Knight to guarantee defaults.

    I don’t know how long the Government is going to cover for this crime, but as soon as more people will learn the Truth, everything will collapse.

    America never had so devastating corruption and uncontrolled crimes by people who call themselves “successful capitalists” – aka thieves and slave owning fascists – oligarchs . Even during Wild Wild West times and roaring 1920th

  2. Don’t forget to include the PROPERTY Taxes Extortion Racket of Public Parasites Unions everywhere ……. the Escrow is the best and easiest place for the Debt Collector Servicer to get homeowners into default.

  3. Thank you for ALL you have done to help property owners Neil. I just wanted to wish you a very happy and prosperous NEW YEAR!!! Please stay happy, healthy, and safe.

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