Home > Miscellaneous Musings > Squid. Ink.

Squid. Ink.

It’s always funny to see the reaction of the Establishment to something that could really threaten their little State-sponsored counterfeiting scam.

The first reaction is to studiously, diligently ignore the threat.

The second reaction is to suppress any individual, humanizing, story about the problem.

The third is to obfuscate.

The fourth is to deflect.

The fifth is to distract with ridiculous, hypocritical and inconsistent arguments.

The sixth is to change course or run or shoot anything that moves.

Foreclosuregate is exceptional in that the issue was at stage one for years, since 2007, with only fringe writers such as Ellen Hodgson Brown reporting on the story.   Then it went from stage one to stage five in a matter of weeks.

Check out this piece from the establishment journal of record, The Economist:

AMERICA’S mortgage lenders are again at the centre of a scandal. This time the cause is not the recklessness of their lending, but the sloppiness with which they are dealing with the resulting defaults. Recent revelations suggest that many lenders rode roughshod over legal niceties to push delinquent borrowers out of their homes. Although banks claim the irregularities are minor, “Foreclosuregate” risks becoming a quagmire. Prosecutors across the country have launched investigations. Many politicians (though to his credit not Barack Obama) have called for a moratorium on repossessions.

None of this will help America’s moribund housing market. Tying the process of repossession in yet more knots will make it harder for the market to clear and for house prices to find a floor. Ideally, politicians ought to speed up foreclosure, which in some states can take up to two years. Moving somebody out of his home quickly may sound heartless; but stretching the process out is a bad idea. Would you bother to look after a property you were due to be expelled from?

Unfortunately, few politicians are likely to champion faster repossessions. And even if they were to, the scale of America’s mortgage mess would still be daunting. Around 2.5m homes are in the process of repossession, and 11m (or nearly 25% of all homes with mortgages) are “underwater”: borrowers owe more on their mortgage than their houses are worth. Since it is hard for such people to move home, this not only causes misery, but also clogs up America’s labour market.

Both lenders and the overall economy would be better off if more delinquent mortgages were restructured rather than foreclosed. The Obama administration, like George Bush’s team before it, has tried schemes to encourage lenders to keep people in their homes by reducing their monthly mortgage payments. But these have not worked well, mainly because reducing payments does little to prevent default when houses are worth a lot less than the outstanding debt.

A better route would be to reduce the mortgage principal, giving borrowers a bigger incentive to pay their debt. Even though they know this would probably mean they would one day get more money back, banks dislike this. If you let one person off paying what he owes, then surely his neighbour will want the same? Also, many homes have several claims or “liens” on them, which complicate any debt reduction. And lenders fear lawsuits from mortgage bondholders if they start writing down loan values. These are reasonable worries. How might government encourage a better outcome?

One extreme is to bribe banks into action with big subsidies: but that would require a lot more public money which voters are not inclined to provide. The other is to force the banks’ hand, for instance, by changing the bankruptcy code to allow judges to restructure mortgages in the same way as other loans. It might indeed make sense to change the law for future mortgages, but rewriting loan terms retrospectively tramples on existing contracts and property rights, and should not be done lightly.

So the best bet is a series of more moderate options to nudge lenders in the right direction. Regulators should force banks to write down the value of second liens, which are often held at vastly inflated values on their balance-sheets. Existing subsidies for preventing foreclosure should be redirected towards reducing principal. Congress could shield banks from lawsuits that arise from a mortgage reduction, and offer favourable tax treatment to “shared appreciation” mortgages, where lenders share in the gains if houses subsequently rise in value.

Even these changes would be politically difficult. But, paradoxically, Foreclosuregate may actually help. By shining a spotlight on the scale of the mortgage mess, it also opens an opportunity for a fresh start.

Notice a couple of delicious points coming out of this piece.  First, mortgagors testing fundamental legal principles relating to the legality of foreclosure is characterized as ‘Tying the process of repossession in yet more knots.’  So much for legality and due process when the banks need to ‘clear the market.’

They then quickly add the following little gem: ‘Moving somebody out of his home quickly may sound heartless; but stretching the process out is a bad idea. Would you bother to look after a property you were due to be expelled from?’


Moving somebody out of his home illegaly sounds heartless.  And… there’s no other way to say this… criminal.  So The Economist is arguing that, for good old practical utilitarian reasons (markets would work better if underwater mortgagors not paying their mortgages were kicked out of their homes), fundamental legal rights – they call them legal ‘niceties’ –  should be ignored.  Right.  So much for the sanctity of property rights.  The Economist sounds like Mao during the Cultural Revolution in this piece of obfuscation.  It’s for the good of ‘the people’ (that is, us) that we make them homeless – illegally.  It’s really for your own good.  It’s the magic of ‘the market’ at work.

Hmmm… anyone see the logic here?  Neither do I.

Then the whopper: ‘It might indeed make sense to change the law for future mortgages, but rewriting loan terms retrospectively tramples on existing contracts and property rights, and should not be done lightly.’

Property rights are trampled on – when the banks are forced to allow a cram down.  But the mere act of kicking someone out of their own home due to faulty chain of title on the part of the banks is a tiresome impediment to letting the market clear, ‘tying [up] the process of repossession in yet more knots.’

Theft is always more palatable when it’s you who’s doing the thieving.

Theft always looks nasty when you’re on the losing side.

The sheer chutzpah of this piece is astonishing.  But the elite didn’t get elite without a strong sense of self-preservation and a robust natural immunity to cries of justice and fair-dealing from the common masses of ‘little people.’

Categories: Miscellaneous Musings
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