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by Kenn Spacefield
Wednesday, Oct. 08, 2008 at 4:22 AM
Mortgage Backed Securities and Derivatives are Flawed and Failing.
The mortgage debt problem is simple really, it has been a total mis-appropriation of equity. The equity lost on flat screen TV's, boats, new cars, vacations, and other living expenses; is equity lost forever. This loss of equity spent on consumer goods and expenses is a pyramid scheme of hyper-capitalism that is flawed and failing. Equity not spent on the property the equity comes from, is equity lost forever, a mis-appropriation of funds, and inappropriate; it is a failing economic model.
Mortgage debt is public, and traded globally, but home appreciation on debt is private profit. This economic model does not work. The idea that mortgage debt is a shared risk of the global economy, interest on the debt is deductible to homeowners, and the appreciation on the debt is private profit; is an economic model that does not work.
The US government promotes and encourages home ownership with tax incentives. The more you owe, the more interest you pay and write off on your taxes, and the more money you make on the appreciation on the debt; if the house goes up, and always goes up in value. This is a failing economic model; because of mortgage interest deductions, shared debt risk, and private profit.
Keeping home mortgage interest tax deductible for the homeowner while they collect equity appreciation on their debt, is a self inflating pyramid scheme propped up by the federal government. The homeowner is rewarded for taking on a higher interest mortgage payment, and this encourages and rewards debt. (People get the biggest house they can afford or maybe two, and use it as a "write off".) This is just plain wrong and this house of cards is flawed and failing. (Home equity loans that are not spent on home repair, remodel, or improvement, is equity lost forever; and its deductible! If everyone's idea is to "up size" now and "downsize" later, who is going to be "up sizing later"? - The retiring baby boomers?.)
The federal governments debt, mortgage debt, and the loss of value in real estate is going to continue to climb. Housing prices will fall until people can afford to buy homes on what they actually earn. The United States has destroyed its reputation and economic trust globally and trashed the constitution here at home. This is a meltdown globally from the US being seen as a respected "superpower" to now being seen; as a bully you cannot trust. All the federal debt and real estate value loss is going to cost the US government a lot, but I feel the damage done to the United States reputation globally and at home; will cost it even more.
I have felt for twenty years real estate has been over-valued, and over priced. Real estate appreciation has been ridiculous and unsustainable. I am still not ready to buy, as the prices are still not low enough, and have 20 to 30 percent - and even 40 percent to drop, before people, on what they make can afford them. This is real estate coming back down to earth, and I am not panicked, or in crisis.
Americans are making less, and housing just kept rising and costing more, more, and more. Hows that working for you?
I have heard there are 70 million (plus) disenfranchised (under-paid) Americans who do not file income tax. I feel more people are feeling disenfranchised with the federal government and I feel this number will rise. This disenfranchisement causes people to shy away from passive participation with the federal government, to active non-participation in the economic affairs of the federal government.
Buying a house turns your life into a business, and the federal government then has total access and knowledge of your finances. The financial markets use government papers to qualify you for a loan.
The federal government has ruined itself in my eyes. I hope for its "fiscal" failure; due to deficit spending. I hope the federal government becomes bankrupt and irrelevant.
It is all about the real estate, which is all about the money, and the federal governments goldmine of income tax collection, turning out to be a dilapidated money pit.
The debt from bad war, torture, illegal imprisonment, domestic spying and "other" bad debts; that the US federal government has yet to realize, tabulate, or equitize. If you have lost your job and your home; the US has lost a taxpayer.
From Gold Mine to Money Pit - the 2008 fall of US Residential Real Estate. A Trillion Dollar band-aid Bail Out that - (like most homeowners did with there equity money and their last home repair; put a band aid on it, and spent the money somewhere else) does not fix the problem.
Are you part of the problem?
The US governments encouragement towards home ownership and the tax benefits granted are well known. With real estate appreciation and the tax credit, it is like living in a little gold mine. You can chisel out equity as you go along your merry way and chuckle at all those people who did not buy real estate sooner.
Where I live houses have doubled in six-seven years and land has doubled in five years. Now land and houses are not selling even at reduced prices, because they have not come down enough to be affordable to the people who live here. (A lot of Californians moved to Washington state and that drove up prices - boy has that slowed down!)
This "bail out" is an absolute joke. The idea the US government can control or diminish house mortgage failure or control or influence the price of housing; is absurd.
Many more people will be walking away from their home mortgages and a lot more mortgage derivatives will fail. This is not the stock market talking, it is home prices on main street.
It is the chiseling away at equity by homeowners who now find their little gold mine is a money pit. It is worth less than their debt they have piled onto their home and the mortgage, and it only makes sense to walk away and buy the house next door for thousands less.
Will the bail out work?
No one knows if the US governments bail out of bad mortgage debt will work.
I feel it is a trillion dollar band aid for a much larger problem; and whether or not it works - will mean what you meant by; "Will the bailout work?"
I feel it is only going to slow the economic problem down in hopes US residential real estate will start to appreciate and the "crisis" is solved.
So the question really is; When will US residential real estate start to appreciate?
No one knows, but here is my opinion;
The US residential real estate market will not be appreciating much over the next ten years.
US real estate is over-valued and still has not come down enough to sell excess suburban homes.
A lot of US residential real estate built over the last 30 years was built out of materials with a 30 year lifespan.
Tens of millions of US homeowners are aging and selling homes in the suburbs and this will accelerate.
There is an exodus from the suburbs to population centers as traffic, cost, age, and pollution, become more of a concern.
The US is experiencing high unemployment, and an economic "slowdown" as "consumers" have less to spend.
The number of residential mortgages "underwater" will continue to rise for at least a year.
It is no longer a new homeowner "sub-prime" lending problem - as many "prime" older homeowners are now underwater due to the constant chiseling away at their equity through second mortgages, and equity lines of credit.
Sixty to eighty percent of US residents are two weeks from the streets, if their lines of credit-money and/or job is lost.
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