Emptywheel replies to some of John’s earlier posts about the foreclosure crisis. Much of what she writes is similar to what I have read elsewhere (I’ll include some links to that as well):
John frames this as an issue of stopping bad foreclosures. But that’s not the problem, not by half. The problem is that the problems exposed by foreclosures in judicial states are problems that exist throughout mortgages that were securitized in the last 6-10 years. The reason the servicers are going to such lengths to make up for deficient paperwork–including robo-signing affidavits or counterfeiting notes–is presumably because for at least a significant portion of mortgages that were securitized, the paperwork is not in order. What we’re seeing through the foreclosure process is just what is getting exposed through the random sampling of foreclosure, and any other random sampling of securitized mortgages would presumably have the same level of deficient paperwork.
[….]This may well be catastrophic whether or not there’s a moratorium on foreclosures until such time as people start admitting what’s going on.
Here’s Janet Tavakoli in an interview with Ezra Klein:
This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional.
Argentina’s sovereign default has been called “the slowest trainwreck in history”, but this one might turn out to be slower, bigger, and much less fair. Millions of people have already lost their houses to lenders who didn’t have the proper paperwork, and it’s unlikely they will ever get any redress. For people who haven’t yet been foreclosed upon, however, it could now be a very long time before they lose their house.
BR
Because I’m generally clueless on these issues, I’m still confused about the bottom line.
Does this mean that some of the big banks will take a hit, and as a result we’ll see a repeat of 2008 (but starting at our already lower level)? I suppose that’s what I’m expecting this means, because I can’t see how someone won’t end up getting hit financially for this.
And is this the sort of thing that is expected to be recognized as a big problem soon (as in, does this mean we’re going to see the stock market tank in a month)? Or will this get dragged out for years in court cases and there won’t be any moment of reckoning?
General Stuck
Christ, what a clusterfuck. Capitalism run amuck . Now everyone all at once. [[[MR WIZARD}}}
DougJ is the business and economics editor for Balloon Juice.
@BR:
Good question, I don’t know the answer.
One thing that’s interesting to me: a friend of mine who worked in mortgages at a big bank told me there was all kinds of crazy shit with the mortgages that were getting securitized. Basically, they knew that a bunch of this shit getting packed into the bonds was bogus, but they were making so much money selling it they didn’t care. I don’t think the big banks were doing much falsifying of anything themselves, but the guys they were buying from (mortgage brokers, I think is what they are called) were.
Chris
The first two statements are quite correct. In the rush to turn over loans, mortgage originators, title insurers, servicers, and so on all* essentially “lost track” of a significant fraction of necessary data. Without this, the “ownership” of any given property, and the possible remedies in cases of errors anywhere in the payment streams, became unclear.
Note that errors in payment streams mostly occur when borrowers fail to pay … but only “mostly”. I have seen many anecdotal reports of someone (not the borrower) dropping the ball when a mortgage servicer sold a payment stream to some other mortgage servicer (this is a normal, everyday occurrence; in the old days it happened when the entire mortgage was sold, these days the task has been sliced up in the same way as the payment streams themselves).
You can see how much of this came about due to the incentives, or lack thereof, in the process: a loan originator would plan to sell off the mortgages ASAP, so all they really care about is getting the lending done. Should there be a problem with the title, or should the borrower default three months, six months, or a year down the line, it would not be their problem.
The new rules (“skin in the game”) help; whether they will help enough remains to be seen. It’s worth noting here—I have no idea whether I am the first to do this—that the “amount of skin”, as it were, that one stands to lose is offset by the profit one stands to make, and the latter varies with interest rate. With loan rates being low today, profits are smaller, so a five or ten percent stake in the loan is significant. Should loan rates rise to (say) 12%, as they were in the 1980s, a 5% “loss of skin” might become a negligible risk, compared to the profits resulting from making dodgy loans. But this is a problem for future regulators….
*footnote: By “all” I mean “some more than others”, obviously. Some people did their jobs, despite the fact that the pay came regardless.
BR
@DougJ is the business and economics editor for Balloon Juice.:
Interesting. I might mention that last year some computer scientists proved (in the mathematical sense) that it was possible to bundle crappy mortgages in such a way that nobody, with any computing power less than, say, the NSA, would be able to determine the true value of the bundle. As in you could provably sell crap as AAA rated securities. Maybe the bankers didn’t know this was possible formally, but they figured it out.
Edit: Here’s the paper:
http://www.cs.princeton.edu/~rongge/derivative.pdf
RalfW
These f*^king idiots who are already back to paying themselves bazillions (and whining about taxes) appear to have engineered not just one, but several sequential financial disasters.
They should be inventing financial weapons for the Pentagon rather than perpetrating banking.
DougJ is the business and economics editor for Balloon Juice.
@BR:
That’s really interesting.
DougJ is the business and economics editor for Balloon Juice.
@Chris:
Yes, that is exactly as I’ve heard it told.
Chris
@BR:
My bet is on “dragged out for years”. Also, individual states will pass various new laws (remember that the details all vary from state to state) in an attempt to de-inseminate the pregnant female dog. :-) But it’s really anyone’s guess.
arguingwithsignposts
I am still waiting for the big CRE explosion that has been predicted since at least mid-2009.
And fwiw, emptywheel is saying what Omnes and Mnemosyne were saying in the previous (just making shit up) thread in response to Norwegian Shooter.
The Republic of Stupidity
Gee… I wonder how the Chinese would deal w/ something like this?
RalfW
I’m not clear on whether the banks and/or security holders stand to loose stunning amounts more money. So much of this crap was written down in the last few years that maybe not (but maybe so).
The short to mid term risk is that it will take much longer to clear all the deadwood, and foreclosure prices are gonna take another tumble.
I’m actually in the market to buy a condo right now. There are 5 units in the complex I like that are for sale. Well, 4 plus a foreclosure auction this Friday. And I if I liked that unit’s floorplan+view, I’d still not buy, because I’d be so freakin’ uncertain that I’d ever get clear title.
So the already constipated and price-shocky realestate market is going to get worse this winter because of these “masters of the universe” and the secret bombs embedded in their bad deals.
And of course as prices fall again, and insecurity reigns in realestate, all the related businesses suffer again. Double-dip, anyone?
Omnes Omnibus
@arguingwithsignposts: Shit, and I was just going to argue with everything emptywheel was saying.
arguingwithsignposts
I would also note that much of this has been hashed and rehashed by This American Life and the Planet Money team in The Giant Pool of Money and the followup shows, with the exception of the latest foreclosure twist. Although I’m sure the Planet Money podcast will be delving into this.
The Republic of Stupidity
@DougJ is the business and economics editor for Balloon Juice.:
Musical chairs on a vast, hither-to unimaginable scale?
I thank my lucky stars I’m a cheap, thrifty bastard who believes in cash…
BR
Oh, another maybe dumb question. What does this do to the “months of inventory” number that is often talked about. The way I understand it, the only way to return the market to normal is to reduce the inventory, which means clear out pending foreclosures, and sell/auction them off one by one. Once that process runs its course, the market will be stable again and inventories will be down.
If all foreclosures are thrown into doubt, doesn’t that mean that we end up in a weird limbo land where recent or pending foreclosures can’t happen so those houses can’t be sold, but at the same time that results in more demand for the fewer houses (non-foreclosures) on the market thereby artificially boosting those house prices? Or will it cause home buyers to be skittish about bad paperwork and just sit it out until the mess is cleared, causing prices to tank?
arguingwithsignposts
@Omnes Omnibus:
Sorry to bust your cover.
To clarify, I only read the excerpt. TBogg is the only writer at FDL that gets clicks from me.
Omnes Omnibus
@BR:
Not just buyers, but lenders and title insurance companies as well.
Roger Moore
@BR:
I can’t answer this question because I don’t know enough. I suspect that nobody can answer this question, because this is such a big problem that the only solution will be to make up new rules as we go along. My best guess is that the long term solution will involve a lot of looking around for the original paperwork and then locking all of the big financial companies involved in a room and forcing them to come up with a solution that avoids massive lawsuits. I strongly suspect that a big part of the solution will be new laws that retroactively validate transfers where the intent was clear but the paperwork wasn’t done properly.
BR
@Omnes Omnibus:
So, do you think that housing prices will take a serious hit then? Or is it going to be dealt with fast enough that the average buyer won’t realize there’s an issue before it’s resolved?
And I was thinking of buying a house, too. With this whole mess I’m not sure that’s such a good idea, which I guess makes the point – since it’s hard to tell how this is going to play out, folks may just stop buying and wait it out.
BR
@Roger Moore:
I wonder if they’ll have to hope they can put this mess on ice until the middle of next year, because I can’t imagine some complex new financial law getting authored and passed before then…
Mark S.
Ezra interviewed Rep. Brad Miller last week and the congressman had this to say:
and
This could be really fucking bad.
Omnes Omnibus
@BR: My guess, and take it with a huge grain of salt since I am not a real estate expert by any means, is that prices will take a hit.
KG
another way this plays out is that the debts may become unsecured. title may end up going to home owners, but the debt could survive without the threat of foreclosure. I don’t practice bankruptcy, I don’t know what it would mean if the home owners then defaulted, had a judgment recorded against them for defaulting, and then filed bankruptcy.
This whole mess is also one of the reasons that servicers and investors have been keen recently on short sales. The loans get satisfied, title gets transferred, and the issues get swept under the rug.
BR
@Mark S.:
Interesting that Brad Miller makes the observation that was mathematically proved in the paper I linked above (edit: I don’t mean just information asymmetry, which is well known, but how they could leverage it to hide true valuation):
Omnes Omnibus
@KG: If the title goes to the homeowners, the mortgage on the property is wiped out, right? The note still exists, but is not secured. The unsecured note could, and I stress could, become dischargeable or modifiable in bankruptcy. Isn’t this an ersatz cramdown?
Ailuridae
@DougJ is the business and economics editor for Balloon Juice.:
If you want to figure out where fraud happened in a previously stable and secure market it is always wise to look at new participants and players in the market. I can almost remember to the day when I started noticing retail mortgage lenders start appearing on major corners in Chicago and I couldn’t figure out how, exactly, they were going to make money. There isn’t much to a mortgage and I didn’t understand where efficiencies would be.
And it turns out that a lot of those mortgage lenders were falsifying documentation, etc. So they were the front lines in the scam. I don’t think banks should be absolved of responsibility (unless like mine they never bought securitized products or securitized any of the mortgages they sold) either because being ignorant is no excuse.
That’s a long diversion but I largely wrote it because I have been looking for an excuse to post my all-time finance related internet winner ever.
The Subprime Primer
or the mortgage mess explained by stick figures.
KG
@Omnes Omnibus: probably not. If you’re buying at a short sale, the loans are considered satisfied. If you’re buying an REO, you’re likely going to have standing as a bona fide purchaser in good faith. Litigation costs are going to preclude a lot of people from litigating these claims… in California you can get attorney fees if you can win a quiet title claim. The problem they’re going to have is the statute of limitations on the underlying fraud claim, and proving up fraud.
KG
@Omnes Omnibus: again, I don’t practice BK, so I don’t know what would happen. But I suppose the court could order a sale of the house to satisfy the other debts… possibly?
Roger Moore
@BR:
I don’t think this is going to get settled any time soon. There’s a whole lot of paperwork out there that needs to be tracked down. If it were a matter of days or weeks to do that, banks wouldn’t be busy with forgery mills. It’s going to take a long time to get the paperwork sorted, and doing that seems like it’s a necessary preliminary to coming to any kind of agreement.
Omnes Omnibus
@KG: It’s just a thought. I don’t do BK or RE, so I am sort of thinking aloud (but with me fingertips).
Roger Moore
@KG:
Not in a state with a strong homestead exemption. Home owners in Texas and Florida would be sitting pretty.
KG
@Omnes Omnibus: just checked with a colleague who has some BK experience. thought is that the trustee could sell any asset to offset/satisfy debts. and in this scenario, there’d be 100% equity, so at the end of the day, I think a lot of borrowers are going to still be on the hook for these debts one way or another.
Eric U.
I’m not really sure how many homeowners have really gotten screwed by this paperwork snafu. Sure, there are some people on the margins that have a measurable amount of equity in their homes that probably wouldn’t have even been foreclosed on if this mess wasn’t happening. And we probably need to put the brakes on the system for those people because the banks seem to be prioritizing foreclosures when they have the least to lose on the houses. But for every one of those, there are any number of people that had small, if any, down payments and are horribly underwater. I don’t really understand why those people wouldn’t just walk and recognize that since they bought an overpriced house, they lost money. I feel like the best bet for the banks and society in general is if we somehow provide enough incentives to keep these homeowners in their houses
Omnes Omnibus
@KG: In a Ch. 7 liquidation, the holder of the note would be an ordinary unsecured creditor, I would think. So he lines up with everyone else. If it is a Ch. 13, it would be a restructuring so the debtor would keep the house and an value and payment schedule would be set, cramdownish. I have now exhausted my stock of BK knowledge, and I have certainly missed a number of vital details.
John - A Motley Moose
I don’t know how this is all going to play out, but I’m willing to bet on one part of the outcome. The masters of the universe will figure out how to make billions off this mess, probably at the taxpayers’ expense.
Norwegian Shooter
@arguingwithsignposts: fwiw, if if and buts were candy and nuts, emptywheel would have a merry Xmas. And my points were specifically to the issue of whether slowing down foreclosures was a good thing or not. And if you remember, you three started with
but ended up with
But let’s end on a good note, I will agree that if as many titles as emptywheel suspects are clouded, yes, that is bad for people who can afford their current mortgage, but want to move and either are currently in a property that was financed in the last 6 to 10 years or want to buy a property that was financed in the last 6 to 10 years. What nobody knows is just how “systemic” that category is.
Sorry for the quick brush off, but TDS and TCR were calling.
KG
@Omnes Omnibus: end of the day, I seriously doubt that the borrower would be able to prove the underlying fraud in order to quiet title.
Eric U.
I just read about why the foreclosure screwups matter. I’m still not absolutely convinced that the victims are primarily homeowners. It looks to me that there are going to be a lot of investors that are going to lose money over this, and it sure looks like the proceeds from the sale of a lot of these foreclosed houses are probably going to be the subject of lawsuits. And buying a foreclosed property looks like a bad idea, so the mess isn’t going to be cleaned up any time soon.
Omnes Omnibus
@Norwegian Shooter: There isn’t just one reason.
Omnes Omnibus
@KG: Sure, take all the fun out of it.
The Republic of Stupidity
@BR:
Well duuuuuuuuuuuuuuuuuuuuuh…
Steve
@KG: One of the most important features of a mortgage is that it is nonrecourse. The only way the lender can satisfy the debt is to foreclose on the house. If there’s not enough value in the house (you’re underwater) then they just lose. They don’t get to pursue your other assets or take a deficiency judgment against you.
Having your mortgage replaced with a general, unsecured observation could be very bad for you, the homeowner. Sure, maybe they can’t foreclose on your home any more, depending on whether your state has a homestead exemption that protects it. But they can go after all your other assets, they can garnish your wages, they can do anything else that’s legal to collect the debt. Most people who are considering defaulting on their mortgage wouldn’t want that deal.
Brachiator
What I love most about this foreclosure train wreck is that simple minded conservatives will continue to blame homeowners for making bad loans, and not the lenders who violated every sound business practice in order to squeeze out profits from fees and securitized mortgages. They will then blame Obama for bailing out lenders and homeowners. Meanwhile some financial institutions are reporting profits and paying out fat bonuses even as they try to figure out what to do about defective foreclosures. Inevitably, the government is going to be left holding the bag on debts and toxic assets while the bankers get to keep their loot.
Mnemosyne
@Norwegian Shooter:
I don’t think we (or at least I) were arguing with you specifically about the need to halt foreclosures. It was more a slow dawning of, “Holy shit, this is worse than just foreclosures. This could affect everybody with a mortgage.”
So, yes, not just one reason.
Martin
@Brachiator: Yeah, I’m talking to my dad along these same lines. We’re determined to vote these guys back into power that created this shitstorm. I swear, if we have end-to-end Republican power in this country in 2012, every Democrat should just stop paying their mortgage. Full stop. 40% of the country. Let them fix that problem.
Ruckus
Emptywheel is right. We are not only seeing the loans that were crappy from the inception in foreclosure, we are seeing a whole lot of good quality loans as well. And it looks like a great number of them have been poorly dealt with and maintained, by the originators, lenders, hell just about everyone who touched or more likely didn’t touch the paper. Any statistician would be able to explain that if you have a large enough subgroup, that has a certain trait to a high degree that was not selected for that particular trait,(and we do), then the main group has a very high probability of having the same trait. IOW if a lot of the paper is bad in the foreclosure subgroup of mortgages, then the whole pool of mortgages will likely have bad paper to a similar degree.
Think about that when you want to sell your house. Think about that when you pay it off and no one really knows that. Think about that when that twenty year old house you just bought has a bad title and no one knows because they didn’t do the paperwork correctly.
None of these things involve foreclosure but they all need the lien to be up to date, to have been properly recorded, to be properly handled. And in many cases it should be pretty obvious that did not happen.
kommrade reproductive vigor
When in doubt, make shit up:
On three … See, large corporations do provide jobs!
But remember, we must maintain the Bush tax cuts so the rich continue to involve the uneducated in their bizarre crimes!
mclaren
I’ve tried to make these points repeatedly in the other thread, but Cole wasn’t having any.
Look. Most of what Cole is complaining about is irrelevant. First off, the entire issue of whether or not congress or the president enact some kind of moratorium with legislation is beside the point, because there’s now a de facto moratorium and it’s spreading.
The de facto moratorium is occurring because the entire process is broken at a basic level. No one really knows who owns these securitized mortgages. Therefore title insurers are refusing to insure homes bought at foreclosure, which means that the sales are grinding to a halt. So regardless what Obama or congress does, the process is screeching to halt like a train running off dynamited tracks.
Second: this is only a preview of the much bigger clusterfvck that’s coming down the tracks in the commercial real estate meltdown. The amounts of money are bigger for commercial real estate, the frauds and scams are much more elaborate and much harder to unravel, and there was more collusion between banks and the companies that got mortgages on dicey commercial properties — because, as the old saying goes, if you owe a hundred thousand dollars and can’t pay, then you’re in serious trouble with your bank…but if you owe a hundred million and can’t pay, then your bank is the one in serious trouble.
Third: a lot of people have overlooked the basic fact that these loans were fraudulent because the banks never expected to make money on the mortgage loans. They repackaged and securitized the loans and sold ’em off within weeks or days. It was a new Ponzi scheme model for banks to make money: instead of loaning for 30 years and collecting mortgage interest payments, the banks made liar loans on overpriced garbage real estate they knew would crash, and made all their money by slicing up the securitized mortgages and re-selling ’em to third parties. That’s why the banks didn’t care whether they mortgageholders defaulted. The banks never intended to hold the mortgages. And they didn’t. So instead everyone else in the economy wound up paying for these garbage subprime loans when they went bad.
It’s exactly the same process we saw in the Wall Street meltdown. Instead of making productive investments, the financial guys repackaged and securitized investments that were pure Ponzi scheme crap and then made all their money off reselling slivers of the securitized investments. The financial guy didn’t care that the investments were garbage because they made all their money off of reselling them in bits and pieces. Once someone else bought their garbage investments, the financial guys didn’t care whether the whole economy went bust. It was pure Ayn Rand: I’VE GOT MINE FUCK YOU.
So people need to realize a couple of things. First, this is the new paradigm for American industry. Churn out a Ponzi scam, repackage and securitize it, make money off selling it to rubes, then take the money and run before everything blows up. This is how American companies make their money on defense contracts — Iraw and Afghanistan were pure Ponzi scams. Contractors like Halliburton sell junk that doesn’t work and kills our troops and the contractors take the money and run. This is how colleges make their money — a college degree is now a Ponzi scam with no prospect of ever returning as much income as a student puts into the overpriced education. So colleges they sell crap courses that don’t educate students and give them no employable skills and when the students graduate with a mountain of debt and wind up broke and unemployed, the colleges take the money and run. This is the new pattern throughout the U.S. economy. Sell a Ponzi scam, securitize it so no one actually owns anything but a tiny slice, make all your money on the Ponzi scheme, take the money and run before the whole system collapses (and it eventually does — sooner rather than later, usually). Harvard economist calls this “the Ponziconomy,” and it’s the future of American capitalism.
This is the way our medical-industrial system now works, it’s the way our military-industrial complex works, it’s the way our education system works, it’s the way our terror-industrial complex now works… In every case, we churn out Ponzi scams like “health insurance” (but it won’t actually pay if you get sick”) or “national security” (but it can’t actually protect you from another 9/11 attack), securitize it and re-sell it to gullible rubes, then take the money and run before the system falls apart.
So this is the future. What homeowners with defaulted mortgages go through today, patients with insurance will go through tomorrow, and people who want to renew their drivers licenses with the ever-increasing requirements of Homeland Security will go through in a few years (“Yes, your birth certificate is acceptable, but your iris scan and fecal sample is not correct and we need a new blood test and new toe prints, so you can’t get your drivers license renewed today…”) If you want to take a plane, it will become increasingly difficult to the point where it will eventually become impossible. If you want to get a college degree, it will get increasingly difficult and expensive to the point where’s it’s effectively both impossible and pointless.
Moreover, the much larger and more long-drawn-out trainwreck of the upcoming commercial real estate collapse will make the current mortgage default mess look like a walk in the park.
So this is where U.S. society is headed for the next generation. It will become unclear who owns what. Everything will be sort of free (empty houses for people to squat in, bittorrent downloads of the latest TV shows and movies and software, more and more government programs to try to maintain a middle class as unemployment relentlessly rises) and no one will have a job. Well, except for cops and bureaucrats and the military, of course. Most people will scrape by doing graymarket work like ghostwriting term papers for rich college kids or modding game consoles so they can play burned DVD-Rs or getting paid by the DHS to snitch on their neighbors a la East Germany.
In case it isn’t clear yet, this foreclosure mess with people living in houses they’ve defaulted on but no one able to foreclose, represents the first glimpse of post-collapse America. It’s the capitalist version of the Soviet collapse. It will gradually become unclear whether anyone actually owns the houses they live in or the cars they drive, just as it will become more and more unclear whether anyone actually has a job — your employer will phone you on the day you’re supposed to go to work to tell you how many part-time hours you’ll get. Are you employed? Maybe you are, maybe you aren’t. Maybe you’ll get no work at all this week and you’ll have to do the freegan thing scrounging through dumpsters. Fortunately your iPhone has an app for that.
Bruce Sterling calls this a “gothic hi tech future.” People living in squats with no electricity but their iPhones are fully connected and give them the best dumpsters to get high-end restaurant food from. That’s the future we’re going to see increasingly in America.
mclaren
I’ve tried to make these points repeatedly in the other thread, but Cole wasn’t having any.
Look. Most of what Cole is complaining about is irrelevant. First off, the entire issue of whether or not congress or the president enact some kind of moratorium with legislation is beside the point, because there’s now a de facto moratorium and it’s spreading.
The de facto moratorium is occurring because the entire process is broken at a basic level. No one really knows who owns these securitized mortgages. Therefore title insurers are refusing to insure homes bought at foreclosure, which means that the sales are grinding to a halt. So regardless what Obama or congress does, the process is screeching to halt like a train running off dynamited tracks.
Second: this is only a preview of the much bigger clusterfvck that’s coming down the tracks in the commercial real estate meltdown. The amounts of money are bigger for commercial real estate, the frauds and scams are much more elaborate and much harder to unravel, and there was more collusion between banks and the companies that got mortgages on dicey commercial properties — because, as the old saying goes, if you owe a hundred thousand dollars and can’t pay, then you’re in serious trouble with your bank…but if you owe a hundred million and can’t pay, then your bank is the one in serious trouble.
Third: a lot of people have overlooked the basic fact that these loans were fraudulent because the banks never expected to make money on the mortgage loans. They repackaged and securitized the loans and sold ’em off within weeks or days. It was a new Ponzi scheme model for banks to make money: instead of loaning for 30 years and collecting mortgage interest payments, the banks made liar loans on overpriced garbage real estate they knew would crash, and made all their money by slicing up the securitized mortgages and re-selling ’em to third parties. That’s why the banks didn’t care whether they mortgageholders defaulted. The banks never intended to hold the mortgages. And they didn’t. So instead everyone else in the economy wound up paying for these garbage subprime loans when they went bad.
It’s exactly the same process we saw in the Wall Street meltdown. Instead of making productive investments, the financial guys repackaged and securitized investments that were pure Ponzi scheme crap and then made all their money off reselling slivers of the securitized investments. The financial guy didn’t care that the investments were garbage because they made all their money off of reselling them in bits and pieces. Once someone else bought their garbage investments, the financial guys didn’t care whether the whole economy went bust. It was pure Ayn Rand: I’VE GOT MINE FUCK YOU.
So people need to realize a couple of things. First, this is the new paradigm for American industry. Churn out a Ponzi scam, repackage and securitize it, make money off selling it to rubes, then take the money and run before everything blows up. This is how American companies make their money on defense contracts — Iraw and Afghanistan were pure Ponzi scams. Contractors like Halliburton sell junk that doesn’t work and kills our troops and the contractors take the money and run. This is how colleges make their money — a college degree is now a Ponzi scam with no prospect of ever returning as much income as a student puts into the overpriced education. So colleges they sell crap courses that don’t educate students and give them no employable skills and when the students graduate with a mountain of debt and wind up broke and unemployed, the colleges take the money and run. This is the new pattern throughout the U.S. economy. Sell a Ponzi scam, securitize it so no one actually owns anything but a tiny slice, make all your money on the Ponzi scheme, take the money and run before the whole system collapses (and it eventually does — sooner rather than later, usually). Harvard economist calls this “the Ponziconomy,” and it’s the future of American capitalism.
This is the way our medical-industrial system now works, it’s the way our military-industrial complex works, it’s the way our education system works, it’s the way our terror-industrial complex now works… In every case, we churn out Ponzi scams like “health insurance” (but it won’t actually pay if you get sick) or “national security” (but it can’t actually protect you from another 9/11 attack), securitize it and re-sell it to gullible rubes, then take the money and run before the system falls apart.
So this is the future. What homeowners with defaulted mortgages go through today, patients with insurance will go through tomorrow, and people who want to renew their drivers licenses with the ever-increasing requirements of Homeland Security will go through in a few years (“Yes, your birth certificate is acceptable, but your iris scan and fecal sample is not correct and we need a new blood test and new toe prints, so you can’t get your drivers license renewed today…”) If you want to take a plane, it will become increasingly difficult to the point where it will eventually become impossible. If you want to get a college degree, it will get increasingly difficult and expensive to the point where’s it’s effectively both impossible and pointless.
Moreover, the much larger and more long-drawn-out trainwreck of the upcoming commercial real estate collapse will make the current mortgage default mess look like a walk in the park.
So this is where U.S. society is headed for the next generation. It will become unclear who owns what. Everything will be sort of free (empty houses for people to squat in, bittorrent downloads of the latest TV shows and movies and software, more and more government programs to try to maintain a middle class as unemployment relentlessly rises) and no one will have a job. Well, except for cops and bureaucrats and the military, of course. Most people will scrape by doing graymarket work like ghostwriting term papers for rich college kids or modding game consoles so they can play burned DVD-Rs or getting paid by the DHS to snitch on their neighbors a la East Germany.
In case it isn’t clear yet, this foreclosure mess with people living in houses they’ve defaulted on but no one able to foreclose, represents the first glimpse of post-collapse America. It’s the capitalist version of the Soviet collapse. It will gradually become unclear whether anyone actually owns the houses they live in or the cars they drive (you can’t afford the car payments or gas, so you and ten other people share the car), just as it will become more and more unclear whether anyone actually has a job — your employer will phone you on the day you’re supposed to go to work to tell you how many part-time hours you’ll get. Are you employed? Maybe you are, maybe you aren’t. Maybe you’ll get no work at all this week and you’ll have to do the freegan thing scrounging through dumpsters. Fortunately your iPhone has an app for that.
Bruce Sterling calls this a “gothic hi tech future.” People living in squats with no electricity but their iPhones are fully connected and give them the best dumpsters to get high-end restaurant food from. That’s the future we’re going to see increasingly in America.
Jeff
@Omnes Omnibus: if that is the case, then the banks may all of a sudden become big fans of the cramdown provision that they fought tooth and nail last year. Nothing like the prospect of getting bupkes to make $.75 on the dollar look good.
Walker
I started reading housing bubble blogs in 2004. This stuff can take a while.
elm
@mclaren, @mclaren:
Mission accomplished.
Joshua
Fucking hell mclaren, I need to go click on some Chilean mine rescue pictures to cheer me up after reading that.