States Have Much Worse Debt Ratios Than Greece

March 31, 2010 at 3:58 am (Banking Crisis)

What’s the difference between 21% debt to GDP and 59% debt to GDP? One is the reported figure for the State of New Mexico, using creative (Enron-style) accounting and one is accounting using the mark-to-market method. If you aren’t familiar with mark-to-market versus “mark-to-value” it’s sort of like a speed limit. Normally, if you are going 80 MPH, and a cop pulls you over in a 55 MPH zone, he or she will say you were going 25 MPH over the speed limit. That’s mark-to-market. Reality.

Imagine if when you were going 80 MPH, you were able to average out the speed of the people around you and compare that to your speed to determine if you were going too fast. Therefore, if you were in a 55 MPH zone, and everyone around you was going an average of 77 MPH, you were only going 3 MPH faster than everyone else and if a cop pulled you over, he didn’t say you were going 25 MPH over the speed limit. He said you were going only 3 MPH over the speed limit, which, in retrospect, not only would probably get thrown out by a judge but probably wouldn’t get you pulled over in the first place. That’s mark-to-value. Essentially, if everyone else is breaking the law, you’re only breaking the law to the degree you break it more than them. At first glance this seems somewhat logical. The problem happens when, for example, everyone decides driving 90 MPH in a school zone is appropriate. If you are going 85 MPH in a school zone, not only are you now not speeding, but you’re actually playing it safe.

Currently, if banks marked their assets to market, they’d all be bankrupt, even with the bailout money, so as of last year, they are all allowed to use mark-to-value accounting, which says essentially that banks get to determine themselves what their assets are worth. So, if they have a lot of repossessed houses that would only sell today for half of what they paid for them, they are still worth what they paid for them — not half, because they’ll be worth that someday, and anyway all the other banks say their foreclosed houses are worth the higher amount too. Forget that the value of something is determined by what you could sell it for today, not in a distant future.

It would be like if a person could say their stocks, even though selling at $10 today, are really worth $20, because they’ll be worth that someday. Or their stamp collection, while worth $3 now, is really worth $100, because they need only one more stamp to make the collection complete. In other words, not reality. It’s not reality because, naturally, one cannot guarantee the item will be worth more in the future, regardless of any calculated probability.

Anyway, this fictitious accounting is what the individual States are currently using to determine how much debt (compared to income) they are holding and how well their pensions are funded. Not surprisingly, there is a wide gap between the two methods of accounting. How wide? Well:

These states are much worse off than the “states” in the EU, such as Greece. Remember that the next time “recovery” is chanted on all the happy media heads.

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Public Wakes Up To Scam Of “Mortgage Honor”

February 9, 2010 at 1:53 am (Banking Crisis, Housing)


Until now, most people who have negative equity in their houses have paid their mortgage whenever possible, despite it being a terrible business decision.  This irrational behavior has been chalked up to the impression that paying a mortgage is like keeping your word of honor. 

Recently, as more people have witnessed how large corporations (and government in general) have defaulted on their contracts, suffering the penalties rather than continuing to pour money down a hole, all legally, these same people are realizing their mortgage is only a contract, with the terms of default spelled out clearly, and taking the default route is not only not “breaking a word of honor” but also not breaking the contract itself.  Default is built into the system which is why homebuyers pay exhorbitant interest to the bank in the first place — the bank is taking a risk.  From an excerpt in one of the articles below:

Loeb said he thinks much of the criticism aimed at homeowners who default is based on a poor understanding of what a contract is.

A contract is nothing but a legally binding agreement between parties with competing interests that sets forth mutually acceptable terms for their interaction.

Loeb said every mortgage loan agreement includes default and home repossession as a possible outcome.

‘If you stop making payments, you’re not breaching the contract, because default and foreclosure are valid means of fulfilling the contract,’ he said.

White said it’s not uncommon for commercial-property owners or investors to default on loans that they no longer consider beneficial, and while it might affect their ability to obtain future loans, no one is calling them immoral.”

A year ago, one could barely see any articles, other than from fringe websites, pointing out it was hypocritcal for government officials to coerce people into continuing to pay nonsensical mortages while watching the banks default on their contracts and receive bailout money in the process.  Now, however, that has changed and there is a flood of articles pointing this out.  The proverbial straw that broke the camel’s back seems to be a recent event in which a bank that owned a housing complex with over 11,000 units decided to stop paying its mortgage, not because it ran out of money, but because it decided the property wasn’t worth the cost.  Cases in point:

1. http://www.housingwatch.com/2010/01/25/the-new-mortgage-revolution-walk-away/

2. http://www.nytimes.com/2010/01/24/business/economy/24view.html

3. http://www.nytimes.com/2010/02/03/business/03walk.html

4. http://www.insidebayarea.com/business/ci_14325323

5. http://www.theatlanticwire.com/opinions/view/opinion/How-to-Think-About-Underwater-Mortgages-2422

6.  http://www.housingwire.com/2010/02/01/strategic-default/

7. http://www.fool.com/investing/general/2010/01/26/why-are-homeowners-idiots.aspx

8. http://www.azcentral.com/arizonarepublic/business/articles/2010/01/31/20100131biz-walkaway0131.html

9. http://globaleconomicanalysis.blogspot.com/2009/10/government-and-lender-policies-of-fear.html

“NEW YORK — Tishman Speyer Properties walks away from 11,232 Manhattan apartments because it can’t pay its mortgage. That’s good business.  Rick Gilson, a college custodial supervisor in South Dakota, wants to walk away from the mortgage on his mobile home. If he does, he’ll be a deadbeat.”

Well said, New York Times.  It’s been years since I’ve read anything in your pages worthwhile.

Today’s article of doom: Aw, shucks, I wonder if some of that rally was overdone?

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Should Auld Aquaintance Be Forgot…

January 8, 2010 at 12:38 am (Banking Crisis, National Debt)

Well, it’s 2010.  I didn’t post much in 2009 because this blog is about doom only.  It’s not my personal life blog.  It’s not a blog about inventions or neat stories.  It’s solely about doom, and 2009 was the greatest year of doom-hiding fakery I’ve ever seen and plan to ever see in my life.

In short, 2009 was one big sham, and it was boring to write about.  I think 2010 will be more interesting.

While the Dow is at 15 month highs and everywhere you turn there are green shoots sprouting and growing and multiplying like a chia pet on time-elapsed camera, I still remain a pessimist about the whole thing, and here are some reasons why.

1) AIG.  Remember the big news that all the major banks had paid back their bailout loans (with interest)?  What if I said they paid it back because in addition to the original loan, the government simply gave them cash in secret to pay it off?  That’s essentially what happened.  Banks that should have lost money on their speculative investments were paid in full by AIG, which means paid in full by the taxpayer, who assumed AIG’s debt obligations.  Oh yeah, and our treasury secretary, purposely didn’t want us to know this fact.  Check it out.

2) Fanny Mae and Freddy Mac.  In addition to the backdoor bailout mentioned above, the government has been covering banks’ losses on crappy real estate bets by buying up “toxic mortgages” through Fanny Mae and Freddy Mac.  And apparently $400 billion is not enough.  Over Christmas, Obama apparently quietly lifted the limit from $400 billion to infinity going forward as the government once again lets banks make trillions during boom times and then sticks taxpayers with losses during the other times.  It’s called privitizing gains and socializing losses, folks.  The banks win and you lose.

3) Public pensions.  They are trillions in debt.  People in the public sector have been promised money and there is no money left.  Unions fight cuts, and taxpayers fight taxes.  Politicians sit with their thumbs in their asses.  And the problem spreads.  Case in point: Illinios.  Apparently those politicians never heard the schoolyard song that that went “…sitting on a fence, trying to make a dollar out of fifteen cents.  You miss.  You miss…” 

4) California, and states in general.  California’s much publicized “budget balancing” last summer was, in the vein of 2009, a charade.  Now it wants $8 billion from the Federal Government because politicians there also won’t cut and won’t tax.  And it’s not just California.  New York is bankrupt too.  Eventually, all states are going to go hat in hand to the Federal Government with the magical money-making machine that can print prosperity.  Amazing, that prosperity machine.  Why don’t we just print quadrillions of dollars?  We’ll be so rich!

5) Emergency Benefits.  The government likes to talk about how the unemployment rate is dropping.  What they mean is the number of new people signing up for unemployment benefits is dropping, and the amount of people receiving state unemployment benefits is dropping, the latter almost exclusively due to peoples’ benefit time limit running out and them still not having a job.  This is easily provable because of a humongous jump in so-called “emergency unemployment benefits” which, conveniently, fall into a different category and aren’t reflected in the official unemployment numbers.  For details, read here.

All of these stories individually are bad enough, but cumulatively, paint a completely different picture than the silly news networks spin.  But then, what can you expect from media, who instead of reporting on the Health Care Debate as a government debt obligation issue (the government has $80 trillion in MediCare and Social Security benefits that are not reflected in the National Debt and knows it can’t afford and is therefore looking at ways to renege on their debts) reports it as a ridiculous philosophical argument between Demublicans.

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Headlines

October 27, 2009 at 10:46 pm (Banking Crisis)

Unemployment is not better.  Nope, not better.

Pension funds are not better.

Real estate is not better.  Oh no, not better.

But the banks, boy howdy.  They are making a killing

(Of course, it’s not hard when you can borrow a virtually unlimited amount of money at zero percent interest and turn around and buy securities that pay a guaranteed 3%.  Even I could make money that way!)

Today’s article of doom: oh yeah, and the government is not better also.

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The Wile E. Coyote Moment Hovering Over The Cliff

August 7, 2009 at 11:07 pm (Banking Crisis, War)

As readers of this blog know, I have maintained in previous posts such as this the position that all the bailouts, which were sold to the US under the guise of buying up bad mortgages and then immediately switched out to saving big banks, credit card companies, insurance companies, etc, will fail until the underlying problem of overpriced mortgages is addressed.  There will be no economic recovery until either peoples’ mortgages are reduced to reflect the worth of their house, or their housing values recover, because the mortgage is the single biggest expense/investment a family in this country makes.  No talk of recovery is meaningful absent this.

Lo and behold this article comes out.  Wow.  Half of US homes will be worth less than is owed on the mortgage by 2011.  If this prediction is accurate, that is when the bottom of this depression will occur.  Who will continue to faithfully pay their mortage year after year knowing all that money is going down the drain and they could be renting for half as much?  How will the banks, absent another series of taxpayer handouts, be able to pretend their mortgage “assets” are worth anything?

Despite all the news about the bottom possibly being in we have horrific facts like the fact income tax revenue is down by almost a fifth, the total bailouts could cost $23 trillion, Fanny Mae needs a (third?  fourth?) bailout to the tune of another $10 billion, and the market is saying California is seen as having a higher risk of default than Russia, which actually did default 11 years ago.

Green shoots!  Hahaha!

Today’s article of doom: The Iraq and Afghanistan wars, originally estimated at a cost of $50 billion, are hovering around the $3 trillion mark.

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Promote the Greatest Failures (Or Is It Criminals?)

June 18, 2009 at 11:08 pm (Banking Crisis, National Debt, Political Correctness)

A post from the very informative Zero Hedge blog summed up some of the more noteworthy comments from the Federal Reserve and the Treasury during this economic debacle:

April 20th, 2007 – Paulson: “I don’t see (subprime mortgage market troubles) imposing a serious problem. I think it’s going to be largely contained.  All the signs I look at show the housing market is at or near the bottom.”

June 20th, 2007 – Bernanke: “(the subprime fallout) will not affect the economy overall.”

October 15th, 2007 – Bernanke: “It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions.”

May 16th, 2008 – Paulson: “In my judgment, we are closer to the end of the market turmoil than the beginning.”

June 9th, 2008 – Bernanke: “Despite a recent spike in the nation’s unemployment rate, the danger that the economy has fallen into a substantial downturn appears to have waned.”

July 20th, 2008 – Paulson: “It’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”

August 10th, 2008 – Paulson: “We have no plans to insert money into either of those two institutions.” (Fannie Mae and Freddie Mac)

February 29th, 2008 – Bernanke: “I expect there will be some failures.  I don’t anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.”

September 19th, 2008 – Paulson: “We’re talking hundreds of billions of dollars – this needs to be big enough to make a real difference and get at the heart of the problem,” he said. “This is the way we stabilize the system.”

September 19th, 2008 – Bernanke: “most severe financial crisis” in the post-World War II era. Investment banks are seeing “tremendous runs on their cash,” Bernanke said. “Without action, they will fail soon.”

And now, the Obama team’s brilliant idea is to give the Federal Reserve sweeping new powers, in tandem with the Treasury, to regulate the banking system.  The very ones who were purportedly clueless about what was unfolding, as well as being the ones who caused it (by artificially lowering interest rates to encourage mortgage lending, thereby bypassing the effects of the dot com bubble bursting), are now going to be in charge.  After, of course, they engineered the transfer of wealth of the entire future generation to the bottom line of the richest banks.  Bravo.

It’s like taking the executives from General Motors and then creating a regulatory agency for all motor vehicles and putting them at the helm.  In short, it’s absolutely ridiculous.  Let’s not forget also, that the Federal Reserve, the organization that controls our money supply, and will soon control the entire regulatory system, is a private corporation.  Like “Federal” Express.  If you aren’t aware of these factors, I suggest checking out this week’s episode of Freedom Watch, which is one of the very view shows on mainstream TV that talk about these issues.

Or, read this book:

But, since we all know the Federal Reserve has more cumulative power than the US president and his staff, dating back several decades from the point in which the US was arguably effectively bankrupt (though this fact was disguised) and real wealth — gold — was outlawed from public ownership and transferred to pay off international debts and the income tax was established to pay interest on our remaining debts… well, we all know this legislation will pass and the central banks won’t have to rule from the shadows any more.  No one wants to be seen as undermining our magical new President’s will, therefore, it will pass.

In the words of Kurt Vonnegut: so it goes.

Today’s article of doom: political correctness is way out of hand when people are arrested to make up a “fair” quota of racial balance completely at odds with established crime statistics.

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California: DOA

June 12, 2009 at 8:53 pm (Banking Crisis, National Debt)

Soaring deficits, reduced income, over-burdened infrastructure, over-burdened health-care system, mountains of unfunded pension liabilities, a politically-correct atmosphere of entitlement (even among non-citizens), and a populace that wants no new taxes.  All of these things define both the Federal Government of the United States and the State of California.  There is one crucial difference, however, which assigns the image of green shoots to the former and tumbleweeds to the other.  California doesn’t print its own money.  Therefore, the state can only spend money it either has or borrows, and no one is stupid enough to lend them anything anymore.  Absent this crucial difference, California is a microcosm of the USA.  Unfortunately, this difference is unimportant in the long run for the Federal Government, because inflating the currency is not a solution; it’s a delay tactic.

So, what can be done for California?  Well, cuts need to happen, taxes need to be raised, money needs to be borrowed (courtesy of the Federal Government guaranteeing the debt, like a parent co-signing on their delinquent teenager’s car loan), or the State needs a Federal bailout.  In my opinion, each of the four options is equally likely, and probably a combination of all four will be the solution.

The cuts needed are mind-boggling, such as eliminating welfare, college funding, and state-funded medical insurance entirely.  And closing state parks.  And letting people out of prison early.  And even eliminating textbooks.  Some people are very, very upset.  But hey, the populace just shot down an emergency increase in taxes, so what’s the state to do?

Obviously, politically pander and beg for handouts from the Federal Government, of course.  With all the chains and conditions such funding will inevitably come with.  In the meantime, as an angry citizen as you most surely are, you can play with the budget yourself and see how you’d plug the gap with this interactive tool.  It’s educational at the very least.  Who’d have thought money didn’t just fall out of the sky over Sacramento?

Almost certainly, some amount of money will get passed down from the Obama administration.  But keep in mind this fact: the Federal Government is in far worse shape than California.  In fact, if California’s debt to GDP ratio was the same as the Federal Government’s, its debt would be 230 billion instead of 25 billion!

Today’s article of doom: Idiotic mainstream media tries to link Nazi shooter with people who oppose the Federal Reserve, fiat money (rather than the Gold Standard), and unconstitutional Income Taxes by claiming the United States never existed without them.

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Where Is The Reckoning?

April 24, 2009 at 8:58 pm (Banking Crisis)

We live in Limbo Land.  Everything in the news is the same, day after day, so we wonder: have we hit the bottom?  Are things really that bad?  Things are still the same in Pakistan.  And Iraq.   And Gaza.  Europe still fears summer riots.  The US government is still giving money to GM.  Unemployment continues to climb.  And mortgage defaults keep increasing:

gse-nod-2009-031

But the world hasn’t ended yet.  The four horsemen haven’t shown up to the party.  In fact, no one has heard hide nor hair of them for as long as most people remember.  Rumor has it they never existed.  Malls are still open with their flat, tinkling music.  Restaurants are still steaming.  Gridlock is ever-present.  What’s the deal?  If a person didn’t read the news, they could easily not know anything has changed in the last year.  Does this mean we’re able to absorb so much more instability than we ever expected?  Was Cheney right when he said “deficits don’t matter?”

No, I think people like John Michael Greer have it right when they talk about “The Long Descent.”  It’s not going to be abrupt, and civilization won’t disappear overnight.  But things will decline steadily, and things won’t return to the way they were before.  We’re so used to instant gratification, we don’t even like to wait for our apocalypses.  It’s been six months and I haven’t had a single blackout — Armageddon is boring!

I’ll admit, I would like things to happen sooner rather than later, mostly so we don’t end up pushing off our problems to our children’s generation.  I would rather face the consequences head-on.  Pushing them off in order to compound them later is what we’ve been doing for decades.   But there is plenty of time for disaster.  In the meantime, there are still a lot of things even the most paranoid person hasn’t done yet to prepare.  This summer should be a particularly nice season for gardening.  Time to kill the useless lawn?  This cycle will last a long while, so we might as well enjoy the beginning of it as well as the end.

Today’s article of doom: if you live in Contra Costa County, sleep soundly knowing due to budget cuts, burglaries, assaults, and thefts will no longer be prosecuted.

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$12.8 Trillion

April 3, 2009 at 12:16 am (Banking Crisis)

Just to put things in perspective, let’s look at the latest figures of money spent “fighting the credit crisis.”  Bloomberg puts the figure at $12.8 trillion.  Oddly enough, it seems the most concentrated rage of the public has been over AIG bonuses; something Congress even passed a bill on in order to confiscate.  Now, while I am just as outraged as anyone that these employees of failed banks are getting millions in bonuses straight from the taxpayer, let’s remember these are only millions.  As in one thousandth of a billion, which is itself one thousandth of a trillion.  Here is the total money spent on the bailout.  Since it’s so massive, each unit represents one billion.  In other words, $1.00 on here means one billion (or one thousand million for the numerically illiterate).  All the AIG bonuses everyone screamed over was about $170 million, so here it would be represented as $0.17:

==================================================
                                                   — Amounts (Billions)—
                                                                                Limit          Current
==================================================
Total                                                          $12,798.14     $4,169.71
——————————————————————————————
Federal Reserve Total                         $7,765.64     $1,678.71
  Primary Credit Discount                       $110.74            $61.31
  Secondary Credit                                           $0.19              $1.00
  Primary dealer and others                   $147.00           $20.18
  ABCP Liquidity                                           $152.11              $6.85
  AIG Credit                                                     $60.00            $43.19
  Net Portfolio CP Funding                  $1,800.00         $241.31
  Maiden Lane (Bear Stearns)                    $29.50            $28.82
  Maiden Lane II  (AIG)                               $22.50            $18.54
  Maiden Lane III (AIG)                              $30.00           $24.04
  Term Securities Lending                       $250.00           $88.55
  Term Auction Facility                            $900.00        $468.59
  Securities lending overnight                  $10.00              $4.41
  Term Asset-Backed Loan Facility     $900.00              $4.71
  Currency Swaps/Other Assets           $606.00         $377.87
  MMIFF                                                         $540.00               $0.00
  GSE Debt Purchases                                $600.00            $50.39
  GSE Mortgage-Backed Securities   $1,000.00         $236.16
  Citigroup Bailout Fed Portion             $220.40               $0.00
  Bank of America Bailout                           $87.20               $0.00
  Commitment to Buy Treasuries         $300.00               $7.50
——————————————————————————————
  FDIC Total                                                $2,038.50          $357.50
   Public-Private Investment*                $500.00                  0.00
   FDIC Liquidity Guarantees               $1,400.00          $316.50
   GE                                                                     $126.00             $41.00
   Citigroup Bailout FDIC                              $10.00               $0.00
   Bank of America Bailout FDIC                   $2.50               $0.00
——————————————————————————————
Treasury Total                                          $2,694.00       $1,833.50
  TARP                                                              $700.00           $599.50
  Tax Break for Banks                                     $29.00             $29.00
  Stimulus Package (Bush)                         $168.00           $168.00
  Stimulus II (Obama)                                $787.00          $787.00
  Treasury Exchange Stabilization           $50.00             $50.00
  Student Loan Purchases                            $60.00                $0.00
  Support for Fannie/Freddie                 $400.00           $200.00
  Line of Credit for FDIC*                          $500.00                $0.00
——————————————————————————————
HUD Total                                                       $300.00           $300.00
  Hope for Homeowners FHA                  $300.00           $300.00
——————————————————————————————

So, about one dollar out of every seventy-five thousand dollars or so went to AIG bonuses.  And yet that lone dollar is the only one that’s generated sufficient rage.  What about the rest? 

The truth is we are such a competitive (and some might say spiteful) group of people, that we’re fighting over the pennies while truckloads of cash are being stolen.  It’s the same reason people are upset about bailing out GM.  Again, I’m not a fan of bailing out anyone; least of all a company who arrogantly refused to develop fuel-efficient vehicles until the last moment, but the total money given to GM so far is about 18 billion, and another 6 billion for GMAC.  So, 24 billion.  That’s less than 0.1% of the total bailout money.  And mortgage owners who took on too much debt — similar situation.  We have 300 billion set aside for that, or 2.3% of the total money spent.  Huh?  If this whole problem is based upon bad mortgages, why have we only spent 2.3% of the bailout money on the problem? 

These three issues are the hot button issues for the public.  People hate seeing their neighbor down the street (i.e. peers) getting a good deal on taxpayer money.  But when bankers, CEOs, and Wall Street get a good deal multiplied by a factor of a million or so, well, no harm no foul.  Those people are invisible to us so it’s not real money, right?  I mean… you know… “we gotta do something.”   And, “our economy depends on these banks.”  And, uh, “credit is the lifeblood of our economy”… right?  But my neighbor’s job or house or car or food is subsidized.  What a jerk.  We’re so easy to bamboozle. 

Speaking of subsization and bamboozling, did you know that every time you use the USPS to mail something, you’re subsidizing companies that send you junk mail

Today’s article of doom: banks will sell their” toxic” (read worthless) assets at the price they determine in a “partnership” deal where the government assumes 93% of the risk.

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The Mortgage Elephant In The Room

March 6, 2009 at 12:23 am (Banking Crisis, Housing)

“When will the housing market stabilize?” everyone wonders.  It’s very simple, actually.  When the government forces holders of mortgages to reduce the principal owed.  Let me explain.

First of all, at the end of 2008, 1 in 5 mortgages were “underwater,” meaning the cost to pay off the mortgage was more than the house was worth.  Since this is March of 2009, the number is probably closer to 1 in 4.  Being as it is cheaper to rent than own in all 50 states, even considering the interest tax deduction, this means the underwater homeowner has only two reasons to keep paying.

1) They don’t want to ruin their credit.
2) They feel the housing prices will rise in a short enough timeframe to justify paying all the interest in the meantime, and will rise steadily thereafter enough to (after factoring in inflation and the value of lost investment opportunities with the lost interest payments) eventually sell and make a profit.

There is no third reason, such as “they intend to pay off the mortgage in full in 30 years and don’t care about the current price.”  The people who fall into that category are the ones who bought at a reasonable price and are satisfied with their purchase because they are not upside-down. 

So, let’s look at the first reason.  Nobody wants to ruin their credit — unless, well, it costs thousands of dollars a month in wasted money to maintain.  Or perhaps unless credit no longer matters, since no one is lending anyway.  Or if everyone around them has trashed credit, making trashed credit not a problem.  Eventually, many people will find that the savings of not paying on a losing mortgage outweigh the credit loss.

The second reason is hinged upon a relatively quick economic recovery which no one anywhere can give any indication will happen.  The vote of no confidence in this is shown by the fact that, at the end of 2008, 1 in 8 mortgages were behind on payments.  Again, since this is March, that number is likely closer to 1 in 6.

So then, what could possibly motivate people to hang on and resume payment?  Only one thing: a stake in the eventual profit.  If all the upside down people were no longer upside down, and actually had some equity, or at least no negative equity, they would be motivated to keep paying (providing they had the means of course — some simply won’t be able to pay no matter what).

Therefore, the only solution is loan modifications that adjust the principal owedThis article explains the fact eruditely, speaking of the much-touted (and reviled) mortgage rescue:

The Obama administration’s failure to close the negative- equity gap means that its plan “will likely join the dud parade of federal rescues,” says John Kiff, an International Monetary Fund economist in Washington.

DellaCamera, 55, the principal of DellaCamera Capital Management LLC, says that government reluctance to force banks to write down the value of distressed loans and securities to prices that buyers are willing to pay creates “gridlock,” delaying bad-debt workouts and an eventual recovery.

That’s exactly right.  The banks don’t want to reduce the principal, nor the interest rates, because then the cat is out of the bag and there is no more maneuverability: the mortages are not worth what they say they are.  And since all the major banks are still on the edge, after all the baoilouts, acknowledging reality might be the same as acknowledging insolvency.  So, of course, the inevitable outcome, like it or not, will be that the government does one of three things:

1) Force the banks to lower the principal, and bail them out or buy their preferred stock as much as necessary to keep them afloat
2) Force the courts to allow bankruptcy judges to force the banks to lower the principal, with the same effects
3) Nationalize the banks in one form or another and modify the mortgages themselves.

This is beyond the debate of right or wrong, smart or stupid.  It’s going to happen.  It is the only thing that will stop housing prices from continuing to fall, because as more mortgages fall underwater, and more people see no recovery is forthcoming, more will stop paying.  And please don’t think anyone in charge cares enough to ask the question whether we should simply let housing prices fall back.  They don’t care what you think.

These guys get it.  They worked for the failing banks that are still pretending they are solvent and their mortages are worth the money they lent.  They know it’s all fake.  Now they’re buying mortgages the government was forced to own, through takeovers of failed banks, at pennies on the dollar, adjusting the principal for the homeowner, and pocketing the difference.  This is the way of the future.  The government (therefore taxpayer) loses, the bankers win, and we all live… whatever ever after.

Today’s article of doom: Think I’m negative?  Check out this guy.

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