"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Monday, October 4, 2010

The Growing Foreclosure Mess in the US

Many of you probably have read up on the growing foreclosure problems in the US. (See this, this, and this) In my view, it's not that shocking. Think of it this way: many of these mortgages were created by lenders that lowered downpayments and decreased documentation - basically, they were creating high risk loans, mixing the "bundles" of loans with so called "A" Paper loans, and calling the entire financial instrument "A" Paper. There was also a lot of mortgage fraud on the origination level, that is, the people that initially qualified borrowers and sold the mortgages.

There is a saying: Garbage in, Garbage out. So is it really a surprise? Should we be shocked that the same institutions that created these ridiculous loans are engaging in the same shenanigans trying to recoup there investments? Maybe it's just the law of large numbers. Maybe the old paradigm of small local lenders is the best way to go, and that allowing a few major players take over a large part of the mortgage market is a recipe for disaster. There's no accountability. These organizations are HUGE.

But there's another way of looking at this. As I wrote elsewhere:
This is merely a symptom of what I have been saying for nearly 4 years now. The current global debt based monetary system is collapsing - it is happening right now - real time. Real Estate was merely the trigger. Ethics, Morality, Politics, and Economic theories are irrelevant to understanding this, in my opinion. Simple math and understanding Ponzi Dynamics, or Pyramid Schemes, is all that is needed to comprehend this.

A debt based monetary system, where money is irredeemable and debt is only "paid off" thru the creation of additional debt ultimately collapses. As Prof. Antal Fekete says, debt is never really extinguished, but merely transferred. In the aggregate, the debt always grows larger than the productive economy’s ability to service it.

The housing bubble was a mere symptom of the evolution of a debt based monetary system driven by private banks and large government budgets. Such a system has ponzi, or pyramid dynamics. It must continually grow or else it collapses. The Banks may have been greedy and irresponsible, but if they were not, the system would have collapsed a while ago. It’s as if the banks had to create this housing bubble fueled by derivatives to continue the ponzi or pyramid. It was never about a “home ownership” society, or helping poor people buy homes… it was about keeping the money pyramid growing. The reckless recordation of mortgages and faulty if not fraudulent filing of foreclosures is a symptom of a larger crisis.

The US government now is backstopping/guaranteeing over 90% of the mortgage market in the US. This is not capitalism. It is central planning on a level that not even the USSR was able to pull off.

So here’s the next issue: If many of these mortgages are owned by Fannie Mae or Feddie Mac, which are both guaranteed by the US government - do these two government sponsored entities force the banks to buy back the loans? Who eats the loss? What happens to the banks? Do homeowners get free homes if the foreclosure process involved fraud?

Try to solve that one.

It’s a nightmare.

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