How the Housing Crisis Will End the U.S.A. as We Know It

21 Jan

04:25 by John Galt. Filed under: Whatever

By John Galt
October 5, 2010

I know that a lot of fans of my writings are expecting another “get in yur bunker and clutch them thar guns and Bibles” type of story but this is, in my humble opinion, a reasonably well thought out picture of America just one to two years from now unless a massive if not tectonic shift in government and the apathy of the citizens occurs within the next ninety days. There will be readers from the lunatic left who will blame the events about to occur in our nation on those evil capitalists and bankers who were unwilling to work with the poor, downtrodden citizens and help them to save their homes, their property, and their standard of living. On the other hand the RINO right will blame excessive government meddling, insensitivity to the needs of the “system” to operate as it was with less regulation, and of course, the current administration for the upcoming disaster.

In reality it is you and I who are responsible for what is about to happen, because we voted for and trusted people into these positions within the economic and political realm to act as responsible caretakers of the power assigned to them, becoming too lazy to engage in oversight, too busy getting “more” in our homes and driveways if not more of a home than to participate and reject the policies and changes which have been inserted into our nation’s economic and political systems over the last eighty years.

Thus the question arises, how does the collapse of the housing system created by a closet Socialist in the person of one Franklin Delano Roosevelt, create the very power vacuum he and his ilk attempted to fill by packing the Supreme Court and creating legislative nightmares of which some still haunt us today? The system as envisioned with shared government oversight and participation within a system of banking and commerce has run full circle as many warned it would during the 1930′s. The insertion of the government as a participant in the marketplace all but guaranteed new standards for home lending on an almost annual basis initially, and an almost quarterly basis in the current era.

The Road Map History has Provided

“We stand at Armageddon, and we battle for the Lord.”

-Theodore Roosevelt, August 6, 1912 final line from the speech “A Confession of Faith” before the National Progressive Party convention

To understand where we are going as a society it is not necessary to rehash the goals of this administration nor the leftist elites who have been drifting our society towards a Statist form of government since 1893. The quote from the 1880′s book by Professor Richard Ely’s book An Introduction to Political Economy, Chapter V is still appropriate to this discussion:

“The danger to freedom appears to be a very real one. It is frankly admitted that up to a certain point there is a tendency on the part of government to improve as its functions increase. But would this hold with the indefinite extension of the sphere of government? Let us admit that our livelihood would depend on the efficiency of government all the force and energy which now go into private services would be turned into public channels. But what would happen if, in spite of all precautions, some unscrupulous combination should secure the control of government?”

The entirety of the socialist experiment is summed up in the statement above as I surmised in my piece of May 2009 titled “Blame Wisconsin” where I outlined how the Marxist/Progressive movement evolved from a test tube case environment in Wisconsin into a national ideal under Theodore Roosevelt. Fast forward to FDR, Truman, Kennedy, Johnson, Nixon, etc. and the evolution of our modern housing finance system should not be shocking nor as disturbing once you pause and reflect on a little history. The plan all along was to insure a universal standard of living for the lower 90% of the population where income distribution was approximately equal and the mercantile class with the cooperation of the banking system and Federal government would insure the economy would function adequately to provide equilibrium of opportunity while providing the mask of capitalism to cover for their exercise of power and oversight.

Fast forward to the era where we are in which began shortly after the Long-Term Capital Management (LTCM) which almost destroyed the financial system due to the Russian debt default in 1998 and has now culminated in the greatest era of financial strife for the U.S. economy since the Great Depression. The danger is this time that there is no safety net other than the threat of hyperinflation from the Federal Reserve and the guarantee that our government (aka, Taxpayers) will undertake any and all actions to preserve the system’s status quo, shaky as that is. Thus to preserve a standard of living being eroded by the very powers entrusted to oversee and manage the economy now lies with the ability or gullibility of the average citizen to accept the ideas about to be presented for the “common good.”

The Average American’s Perilous Addiction To Things

The conversion that evolved with the moral revolution of the 1960′s from a “Greatest Generation” economic model where saving and frugality were usurped by the Baby Boomers consumerism model of owning “stuff” including one or two homes, several cars, televisions, etc., even if the financial means were unavailable at that moment to acquire the goods desired. The economic theory of housing during this evolution included the false impression provided that real estate in the form of a home was an “investment” and that this item should be used not just as a home, but to build a nest egg for the future and if possible use it during the good times to leverage up and acquire more items or investments of any type.

As the past two decades have demonstrated, the average American citizen has become addicted to the art of acquisition, even if they can not afford the items in question by using leverage to spread the payments of months, years, or in the case of a home, decades. The model worked well with modest inflation from the post-Volcker era until the late 1990′s but when LTCM imploded, the managers of America’s and Europe’s financial system realized that the stakes needed to be raised and the accelerated use of credit by the citizenry was a necessity if the bankers were to recover their losses from both the Savings and Loan disaster coupled with the ill advised ventures within the developing world. Hence the creation of new investing instruments for average citizens to participate with plus the evolution of creative financing for real estate purchases or investing were developed. The creation of the first bubble worked beyond their wildest dreams as the tech bubble demonstrated in the late 1990′s, inflating equity markets in many nations to levels that were only dreamed of during that era. The popping of that bubble and the wealth destruction in conjunction with the terror attacks of September 11, 2001 only increased the desperation of the political and financial class, which helped to enhance the evolution of the “ownership society” President Bush envisioned and the bankers salivated over so profits could be as leveraged as much as their balance sheets.

The American citizen’s additional credit card guaranteed by GSE’s like Fannie and Freddie enabled many to take advantage of Greenspan’s new bubble in the last decade and instead of saving to plan for a second or retirement home, the first home was refinanced at a very low rate and the equity extracted to buy “things.” Some of those “things” Americans purchased were courtesy of the belief that this was the ground floor for a real estate boom and you had to get into it now as “real estate always goes up” and this was the time to lock in a mortgage for that budding vacation home, time share, or future retirement home now. I believe that part of the boom was the famous myth propagated by both Realtors and bankers alike was that real estate always goes up in price so you had best get your slice of the American Dream now. This belief fueled speculation not just by professional real estate investors but by middle class citizens who viewed home equity extraction as an excuse to acquire those things their years of hard work had left them “due” and an opportunity to join the upper strata of society without having to work as hard to obtain that distinction. These middle class “investors” figured out the house flipping game at the very end of the bubble, just as they had discovered again the joys of using home equity to purchase stocks and other diverse investments in the 2005-2008 era.

Those beliefs along with the total destruction of housing values and retirements for three generations of Americans co-existing in our society now provides the formula for a national will to accept new ideas to preserve what they believe they have always deserved. Thus one of those dangerous intersections in history is upon us again and the next ninety days will do more to determine the course than any action we have seen since the fateful events of 1859 and 1860.

Preserving the Status Quo With Change

The crisis we face tonight and through the first crisp winter days of the new year will move with dazzling speed and keep historians busy for decades writing about it. The news from Monday was bleak, between the crisis of the “robo-signers” in the processing of foreclosures at the various major institutions to the continuing deterioration of home purchases as report after report is issued by the government and the National Association of Realtors. The most disturbing report was from Amherst Securities, LLC in an article on October 4th ( Amherst: One of Five Borrowers Could Lose Their Homes ) where they postulate:

If governmental policy on foreclosure prevention does not change, 11.5 million borrowers are in danger of losing their homes, according to the analysts at Amherst Securities Group LP.

The staggering figure put forth by the mortgage investment brokerage equates to one out of every five borrowers – an astronomical 20 percent default rate that Amherst says “politically cannot happen.”

1 in 5 gang, let that sink in. If you think that a change in policy will not occur to stop such an event, you, the reader are on crack. The United States government for all of its flaws, devious or not, is not ignorant nor are the political and banking elites of whom we have given charge to manage the economy. The first course of action that will be undertaken has already been rumored with the idea that spread like wildfire throughout the financial system today of a ninety day mortgage moratorium would be imposed by the Federal Government to allow the system to clean up the mess created by the back log of fraudulent and erroneous paper trails. Unfortunately for the government, this does nothing but forestall the day of reckoning as the loss of valuation for many of the distressed homeowners speculated on in the Amherst report above is so grave that even if the homeowners wore able to work out a “sponsored” refinancing program, they would not have any equity for twenty years if housing prices resumed their normal pace of price appreciation.

This means that more creative solutions will have to be engaged in and that is the danger I foresee in our immediate future. Thus “change” to preserve the status quo or to prevent millions more citizens from losing their homes and accompanying crashing of a large portion of the financial system will be the order of the day. What does that sort of action entail beyond the prior solutions postulated like forced forbearance, government loan modifications, or worse?

The “Or Worse” Solutions to Repair the Housing Crisis and Start of Our National Nightmare

Everything in this section is pure speculation on my part as the author, but when you look at some of the proposals of this administration and the financial community it is not that far fetched. The bottom line is that the American system used to finance and purchase homes is irrevocably broken. The blame can be spread to both political parties, the Wall Street Ponzi game, and the irresponsible behavior of the banking community which was initiated under the Gramm-Leach-Bliley Act and culminated with the then CEO of Goldman Sachs, one Hank Paulson the U.S. Treasury Secretary to be, persuading the government to release the limitations on leverage which allowed the mortgage and debt securitization industry to explode in less than two years. This expansion of the credit bubble did not lift all ships equally so the Congress stuck its nose under the tent and accelerated the reduction in standards which allowed totally unqualified buyers to purchase homes who now in turn are abandoning them or part of the problem by the millions.

Thus the solutions become quite obvious and palatable to the members of the financial community because their losses will be minimized if not eliminated and the future liabilities the responsibility of others. The first proposal I look for is a massive expansion of the Fannie Mae and Freddie Mac system under the auspices of a Republican House with strong support from the banking system and the administration to either merge the agencies and create a super housing authority or new GSE (Government Sponsored Enterprise). Within this newly chartered instrument, the government will buy upwards of ninety-five percent of all mortgages, securitized or not, on the market at no less than ninety cents on the dollar plus assume the role for one hundred percent of origination for all mortgages under $750,000 nationally. This would still leave the banking system with the “appearance” of having some private role in the mortgage origination business, while in reality less than 2% of all mortgages created would be their responsibility and they would have the ability to manage the qualifications as they used to, on a case by base basis with strict fiduciary oversight.

Once this super GSE is in place, the mortgages for all delinquent homeowners could be purchased using the power of the taxpayer and the process of selective forbearance begun. This is not only a process which relieves the banking system of the stress of mortgage servicing (unless they wish to act as a contractor to the government, which they would have to initially as the system is created) and the torrid pace of default, but installs a program where jobs are created for former employees who specialize in mortgage finance and accounting, this time though as a government employee. The process of forbearance would be relatively straightforward and the homeowner would be forced into an obligation of thirty to sixty years refinancing based on income, age, and geographical criteria. If the homeowner declines the terms, the government would foreclose then seize the property in question and using a newly expanded Internal Revenue Service have the ability to collect deficiency payments for upwards of a decade to recoup some of their lost investment. This might sound insane but this is the type of radical solution you should be looking for as the alternative is worse than the collapse of late 2008.

That is only the precursor of our national nightmare however.

Imagine a world where you must report to a government official in a bank or other financial institution, maybe even a government office building to apply for a mortgage. Think about the new “green” wave of regulatory bureaucracy plus OSHA style ergonomic designs which will be instituted to “protect” the government’s investment in you the homeowner. For example if a husband and wife of eight years with two children walked into a home that they felt they could afford, the government regulatory regime could determine that this particular home is not ergonomically friendly enough for their children and the transportation costs in carbon would be excessive as the husband and/or wife would live too far from their place of employment. Sound insane? Review the stories emanating from the Mother Country of Jolly Old England regarding absurd regulations and government meddling in their citizen’s daily affairs.

Take this one example then consider the consequences of Kelo v. City of New London decision which could force a homeowner who are current with their payments out of their homes as the Federal Government owns all of the properties within a subdivision and their presence disrupts the ideal of economic diversity because they did not need nor want a government mortgage and their inhabiting of that property could make the new residents feel inferior, thus causing emotional distress. Or worse, if the one homeowner refuses to sell to a potential government sponsored buyer because the seller feels the price is inferior to market conditions the government could force the price to meet the standards of the bureaucratically established level of financing to match the price or use eminent domain to seize the property at the price level some beanie head feels is “just” for the GSE to pay.

This goes far beyond the concepts of financing, buying, and selling homes however. The entire real estate industry will end up subservient to a government master in Washington, D.C. Want to build a new subdivision? Better submit the homes to a standardized review to the Department of Housing Development team. Want to modify your GSE financed home by building a tool shed in the back? Fill out GSE form 4417-E/109.1367 available at your local bank’s GSE department or Federal office building and pray they approve it before the apocalypse. Want to sell to the family that wants to pay cash for the home instead of waiting for the minority who has the fifty year mortgage financing that is offering you 4% less? Nope, that would be discrimination and you no longer have control over property which technically belongs to the people.

See where this is leading?

Once the bankers and government elect to divert full control of the residential real estate market, or at least a majority of it, to Federal control, all private property rights cease in the United States. Want to grow a garden? Apply at the appropriate Federal agencies like the Department of Agriculture. Want to add a pool or a patio? Better hope the EPA carbon impact study doesn’t prevent that from happening. The U.S. will not only have legal physical control of your property outside of the home, but the inside where smart electrical grid systems will become mandatory, ten ounce water conserving slow flush toilets, twenty second showers, and those stupid General Electric Chi-Com manufactured mercury loaded curly bulbs being the only ones permitted. You will comply or the government will penalize you for abusing their home and regulations.

The final straw will expand control into the areas of landlord and property management which shall be regulated via the government buying up those property’s loans and lastly small scale commercial real estate enterprises as the community banking system will implode without direct government intervention and soon. In the end this probably leaves less than twenty percent of all domestic real estate concerns either invested in or owned outright by private entities. With the preservation of the banking system, pension funds invested in REITs, plus the potential “Municide” or collapse of the municipal bond system (as I’ve been warning about since 2008) as a result of the housing collapse, there is little doubt in my mind that this devious yet effective plan to usurp private property rights will be sold as the only solution to the banking and housing crisis without allowing the entire economy to fail and reset. This new initiative will be reinforced with a bailout of the municipal bond system and states which are teetering on default so as to sell support for the program proposed and both political parties will be involved in the process to give it that “bi-partisan” appearance. Knowing the average American’s desire to obtain and keep “things” including their future retirement or home be it ten months or ten years out, look for the political and financial elites to act in a Machiavellian manner which leaves those freedoms God gave us and our Founding Fathers codified as a distant memory to those of us pining for the good old days.

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