Restoring the U.S. Housing & Mortgage Markets?

The past week I spent twenty minutes On Air with Pat Campbell of 1170 KFAQ in Tulsa, Oklahoma. The discussion was, for the most part, centered about various plans presently being tossed about having to do with salvaging the U.S. Housing Markets and what to do with all that pesky Mortgage Debt. Let’s be quite clear, there is no escaping the fact that if the goal is to preserve both the Housing Market AND the Mortgage Debt then there is no solution; there is no way to accomplish both at the same time. To believe so would also then suggest that one can stay dry in a monsoon by stepping between drops of rain! 

What I realized from my visit with Pat was that there are far too many moving targets and idiosyncratic variants related to the discussion that to attempt to cover the subject properly On Air was to risk not giving the audience a fair shake.  Our aim is always to avoid that risk by capturing and projecting a relative degree of clarity and the following is intended to do just that so let us establish a foundational reference by way of a quick and deliberately simplified staging of the relevant issues. 

Centralized Banking: 

It has long been the intention of the Banking System to void fractional (independent) banking interests. The idea of local Thrifts, Credit Unions, Savings & Loans, Benevolent Funds (and a myriad of others) being either in competition with the Federal Banking System or existing within a national banking structure has long been a vexation to the concept of Centralized Banking. It is fair to say – and events and legislative actions-in- abundance and well since 1913 clearly document the same – that the goal has been to eliminate these independent banking structures in favor of the centralized approach creating, in effect, franchise Central Banking. 

The Bank of International Settlements (BIS) effectively sits at the top of the dung-heap with each Nation (or group of Nations such as in the case of the European Union) having its own Central Bank which operates similarly to that of a franchise. It is important, always, that as you follow this dissertation to remember that it is the Central Bank of each Nation (receiving its orders from the BIS) orchestrating both Currency and ALL Monetary Policies (including Lending) of each Nation. 

Anatomically Incorrect: 

The Lending or Mortgage function, specifically in this instance – the Residential Mortgage component – is an extraordinarily profitable venture however the element of market volatility and borrower-based variability’s create the only risk component of the profit cycle. Up until the so-called Mortgage Meltdown, beginning in 2007/08, most residential mortgage funding was cycled through what was known as the Secondary Mortgage Market. In practice the funding cycle occurred in this manner: A Bank or Wholesaler (e.g., Countrywide) would use a Credit Line or some other funding source (e.g., the Federal Reserve directly, a Pension Fund, Portfolio Reserves, etc.) to fund financing demands in the form of Mortgages. The Mortgages are packaged in Marketable Instrument form the most common type being Mortgage-Backed Securities (MBS), then sold off to Investors. The proceeds from the sale, in theory, are cycled back to pay-down the funding source and the process starts all over again – in theory. 

• Profits, typically, to the Wholesalers/Lenders on thru to the MBS disposition are front-loaded – meaning that the profits are earned at point of origination from both fees and margins/yield-spreads (the difference between the underlying cost of the funds and the actual rate that appears on the mortgage.)
• The Federal Reserve has long expressed a desire to consolidate the Residential Mortgage Markets preferring instead a more corporatized approach. However,
• As the National Economic Policy became driven by Inflation-Based ideologies the more appropriate and sustainable Wealth Creation/Productive Output concepts where re-engineered as Free-Trade fodder for the globalization economic myth. The Inflation-Based ideologies thrive on massive inflationary spirals largely driven by meddling with what would otherwise be market-driven forces and fewer commodities are more effective in creating Inflation-Driven Wealth than Real Estate. I’m often asked why is this done and the motive and rational is quite simply this: The entire economic process of a faux economic engine feeds off of the Inflated Value; more homes built, more homes sold, more money borrower, more money lent, more margin/yield spreads, more taxes to the Feds & States, more political juice for the politicians, more equity from which to finance an already unsustainable economic cycle and more, more, more!

“It is fair to say that the causal forces which lay back of the massive mortgage debt which exists in this country are the very same as those that have driven the explosive growth in public debt; the complete detachment from durable economic fundamentals and the adoption of an ideology that believes that Inflation is evidence of Economic Growth, Debt is a Wealth-Equivalent and that Wealth is measured by the ability to borrow. Clearly each of these are both co-generative and irreconcilable forces.” 

There exists and anatomically incorrect  component that is common to all Government—Induced Failures and one whose cause is so surprisingly pure and simple it stings the mind that so few people and so-called experts seem willing to grasp their core flaw. It is both the reason for the crisis and the very reason why it remains unresolvable and one might summarize the core flaw in this way: 

“Failure is assured when there is no Risk of Loss attached to Performance Failure!” 

As to the current issue, i.e., the Mortgage Wars, it manifests in this way: 

“Although the Notional Value of Debt (the amount) is absolutely stated, the Value of the Asset upon which it is attached (or leveraged) is NOT.”

Specifically in the case of Residential Real Estate, the Homeowner is expected to absorb the appreciable loss in value while the very system that both promotes and feeds off of the entire Inflation-Driven Faux Wealth-Creation illusion is first-in-line for indemnification, by the Taxpayer, from the very cycle their processes seed. 

“The underlying metrics which make any of the current Mortgage Restructuring Remedies dysfunctional relates to three distinct attributes: Deflationary spirals in both Real Values (property)& Household Incomes and Static Debt Load (mortgage balances).” 

How Big and How Bad: 

The following information should give a perspective as to the size and scope of the problem at hand. The information sources are from various government and industry resources among them being the Federal Reserve, Fannie/Freddie, FHA, RealtyTrac and so on. 

• U.S. Residential Mortgage Debt, as of February 2011, amounts to approximately $10.1 Trillion approximately $5.7 Trillion of which is guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, each Government Sponsored Entities (GSE’s). Various industry sources estimate the at-risk component to be as much as $6.2 Trillion. To offer a bit of perspective; the Savings & Loan collapse of the late 1980’s involved $520 Billion in book-value assets with a total liquidation cost to the U.S. Government of $91 Billion. AIG bailout alone has been conservatively stated at $53 Billion.
• According to CoreLogic, a data provider, as of April 2011 approximately 23% of the GSE endorsed loans are in a negative-equity position. They estimate the inverse market relationship to be valued at $707 Billion. The Imperfect Messenger Foundations research places the number closer to $1.2 Trillion.
• As part of TARP, the Federal Reserve/Government purchases of toxic-debt/assets have moved beyond the $960 Billion mark. The Governments pre-approved purchase commitments presently stand at $1.45 Trillion.
• The most recent Industry statistics suggest that between 5.7 and 9 million homes are at-risk. At current market-absorption (sale) rates, assuming no further degradation in market metrics, normalization of residential real estate markets would require 11.5 years to resolve.
• As of August 2011, Lender Processing Services (LPS) reports indicate 4.4 Million homes 30 days or more past due but not in foreclosure; 1.9 Million homes 90 days or more past due but not in foreclosure and 2.2 Million homes in foreclosure pre-sale inventory. 
• The Federal Governments Housing Affordability Program (HAFA set-aside of $50 Billion), intended to assist troubled homeowners, has managed a mere 16% participation factor; the primary obstacles being loss in real property values and qualifying conflicts.
• Although various Government mandates require Lenders to restructure loans the results are proving, as in the case with the HAFA Program, to be dismal at best. While in attendance at a recent Real Estate/Mortgage Industry luncheon a Bank of America representative announced that “…our in house statistics illustrate that nearly two-thirds of our restructurings are back in default within 12 months.”  Clearly, this is not a good sign.
• The recent maneuverings of S&P, wherein the result was a downgrading of the U.S. Governments “rating”, possessed a component that appears to have gone largely unnoticed; several Insurance Companies known to be heavily vested in Government Debt are also saddled with broad positions in MBS Portfolios.  It is by no mean a stretch of reason to consider the collateral relationship between the Federal Governments accumulation of toxic-debt/asset, total debt-load and a failed monetary & economic paradigm as nothing short of an unholy and irrational insistence dedicated to preserve and expanding these seemingly unsustainable monetary policies.
• With the collapse of the Secondary Mortgage Market brings with it one undeniable reality; the Federal Reserve remains the only funding source for Residential Mortgages and with a stern reminder of the already insolvent nature of the U.S. Monetary System none should ignore the broadening scope of adverse-risk to the entire Nation. 

Although there are infinitely more reference upon which one might draw I’ll conclude with these as the conclusion one should draw from all of this seems sufficient for one to easily align with one undeniable truth: 

“No single event can be identified that would indicate any intention other than a deliberate attachment to a systemic design failure. The design outcome of failure has always been inevitable.” 

A quick sidebar: There is a component of discreet omission that I’ve not attempted to cover in this commentary; I speak generally of the commercial real estate market and specifically to the very same solvency problem that exists therein as well as the Home Equity Lines of Credit (HELOC) default status that accompanies the residential mortgage insolvency vice. The growing negative-equity and non-performing status of commercial loan portfolios are equally at-risk and HELOC’s book-value remains a staggering $650 Billion plus void approximately 2/3rds of which are attached to Bank of America, Wells Fargo, Citigroup and JPMorgan/Chase. How and in what way any of these issues are ultimately resolved will only color and extend to the greater question: Who will pay the price?    

Misdirection & Intentions: 

At this point what should be clear to any party of concerned interest is that the Vested Interests attached to the Mortgage and Banking Structure of this Nation are not at all interested in preserving the American Household.  It is not so much that they are decidedly adverse to the idea however it is more so that they are more interested and consequently supremely dedicated to preserving the Financial System.  This is precisely why no one as yet has spoken to the irreconcilable facts as presented above however what is forefront in the discussion is best described by the following enumeration: 

1. How do we remove non-performing Loans from Banks Institutions Balance Sheets and do so without showing a Loss?
2. How do we re-cycle the millions of homes either in foreclosure or those which will inevitably become foreclosed properties?
3. How do we protect Investors against loss?
4. How do we keep Banking Institutions from being held accountable for Investor Losses? And,
5. How do we do each of the above without it appearing as yet another Bailout?  

Conspicuous by its absence one should note the omission of: 

How can we protect American Households from the massive losses caused by a systemic failure of a flawed political, monetary and economic policy that has robbed them of their economic freedom and their home investment?  Or, 

How do we regenerate the U.S. Economy so that the American Households stunning loss of income and associate purchasing power is restored? 

The following statement by HUD Secretary Shaun Donovan illustrates several pervasive and equally detached-from-reality suggestions that seem to be carving reason away from rational thought: “Millions of families nationwide have seen their home values impacted as their neighbors’ homes fall into foreclosure or become abandoned. At the same time… we have to find and promote new ways to alleviate the strain on the affordable rental market.” 

This statement intimates some rather alarming and deeply apocryphal notions: 

• Setting the stage for further systemic intervention by suggesting that an “affordable rental market” is now also the domain of government. And,
• Ignoring the economic burden of “foreclosure” and “abandoned” properties to the “Millions of families nationwide.”

What we should have learned from the from the Savings & Loan Debacle of the late 1980’s was that a systemic design flaw produces a cataclysmic outcome and that the only way to address this type of outcome is to do the following: 

• Eliminate the Systemic Design Flaw so that it is not a reoccurring nightmare.  And,
• Let the Markets resolve the process and collateral losses.

What is not a functional component of a successful outcome are the following: 

• Financial subsidies to either the Markets or the Banking Institutions.
• Absorption by the Federal Government (Taxpayer) of the financial losses.
• The use of the Federal Government to entitled so-called Investors. And,
• The use of the Federal Government to create yet another entitlement.

Solutions & Outcomes: 

As we all know, accompanying each problem is a solution; we may not like what is required, we may even choose not to exercise the solution yet an outcome is always assured. I believe that before us lies a truly extraordinary opportunity to witness first hand whether (or not) the Federal Government can actually be called upon to express a truly refined and visionary approach to resolving the current or any conundrum.  It will be painful, it will require discipline but most of all, it will require a faithful regard for noble cause. In short, doing not only what is best, but also what is right. 

For all Primary Residences and Second Homes, the approach would be as follows: 

Mortgages in good standing (no “late payments”): 

• Qualify for an automatic reduction (write-down) of existing mortgage balance to an amount no greater than the Loan-to-Value (LTV) ratio at point of origination.
• Automatic reduction of existing note rate to no greater than 3% above current Fed Funds Rate.
• Existing Mortgage will remain in place with no modification to existing term.
• The modifications will not be eligible for Mortgage Interest Deduction.

Mortgages in Pre-Foreclosure status: 

• Same as above however the Homeowner will have to show either income qualifying capacity (“front-end ratio” only) or show twelve-month debt-service reserve capacity.

REO or Foreclosed Property Inventory: 

• Establish Regional Disposition Facility (RDF) in alignment with Federal Reserve Bank structure and outside control or influence of the Federal Government.
• Transfer all Properties and Disposition functions to RDF while maintaining Lender Identity for eventual notional (loan loss) value reconciliation. Lenders are not suited to handle this function.
• Evaluate Properties based on Salvage/Habitability Attributes (SHA). The purpose of this is to determine if there is restorable value; often many foreclosed properties are substandard and the cost to restore them to habitability status is in excess of their market value. This one concept offers multiple collateral benefits towards restoring market fundamentals and property values.
• Properties with an SHA factor of 60% or better are released for Market Disposition (Sale); those below are deemed uninhabitable and released for Market Disposition (Sale) with a requirement that the improvements be demolished.
• Acquisitions of RDF properties will be limited to U.S.-based enterprises with a domestic ownership requirement of no less than 60%. If these entities choose to participate in or become a part of the residential rental housing market, that is their choice however it is not a program mandate.
• RDF financing will be available at a LTV rate of no more than 60% with an interest-only rate of no less than 4% above the Fed Funds Rate and for a term not to exceed forty-eight months. Each of these Loans will require a personal guarantee with a cross-collateral or insured-bonding equal to the loan amount. There will be no extensions.
• All Loan “write-downs” will be assigned directly to their respective Portfolios for collateral adjustments. Losses incurred will be privileged with direct income offsets against either active or passive income over a term of no less than ten years.
• Loans originated by the RDF facility will be assigned to and be serviced by the Lender associated with the portfolio of the now foreclosed loan. The Lender will carry the Loan on-book and treated customarily in their reserve requirements mandates until such time as the Loan is resolved.
• It is recommended that all GSE enterprises such as FHA, HUD, FannieMae & FreddieMac be permanently suspended in favor of a market-based residential housing funding routine that is based on the principal of permanent portability; one might think of it as a revolving line-of-credit that a homeowner candidate qualifies for on a one-time basis and that can be increased based on income capacity. Other features could be incorporated into this concept to further reduce the borrowing/financing costs of homeownership that are and have proven to be predatory. This concept is also a part of a much large concept of economic reformulation discussed throughout our writing and in the third volume of the Blind-Vision Series: Valor in Prosperity; I suggest you read the entire Series.

There you have it, concise, deliberate and no causal force or collateral mechanism ignored!  Yes, I fully expect that the Political and Financial Apparatchiks will find these suggestions unacceptable which of course is proof of their bias and the strength of these recommendations. 

In the end, if all that matters is our commitment to sound monetary and economic principals, the preservation of the American Households home ownership status as well as the restoration of our National Economy then rest assured these recommendations are exceptional in their alignment to this greater cause. I am however not ignorant to the facts as they are which are considerate of the Political divisiveness that continues to persist and the likelihood that the System will prefer ceding to an outcome that favors its own preservation one which is always and predictable so adverse to the American Family. 

As always, the outcome is up to you; which is precisely as it should be! 

Curtis C. Greco, Founder