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Guest Post: Obama's Re-Fi Plan: The Perfection Of Debt-Serfdom
Submitted by Charles Hugh Smith from Of Two Minds
Obama's Re-Fi Plan: The Perfection of Debt-Serfdom
How better to corral restive underwater debt-serfs than to herd them into accepting a new, "better" set of lifelong servitude shackles?
President Obama is taking credit for a new government plan to "save homeowners." That is of course pure propaganda to mask the plan's true goal: the perfection of debt-serfdom. The basic thrust of the plan is straightforward: encourage "underwater" homeowners whose mortgages exceed the value of their homes to re-finance at lower rates.
The stated incentive (i.e. the PR pitch) is to lower homeowners' monthly payments via lower interest rates.
This is the Federal Reserve's entire game plan in a nutshell: don't write off any debt, as that would reveal the banking sector's insolvency, but play extend-and-pretend with crushing debtloads by lowering the cost of servicing the debt.
The key purpose of this "plan" is to leave the principle owed to banks on their books at full value while ensnaring the hapless debt-serf (the "homeowner") into permanent servitude to the banks.
If the net worth of your home is a negative number, then what exactly do you own? You have the right to occupy the shelter, and you own the debt. So how is this any different from a lease? There is no equity, and no equity being built: there is a monthly payment in return for the right to occupy the dwelling.
The difference is the leaseholder can move at the end of the lease with no debt obligations. The underwater "homeowner" debt-serf is trapped by his/her mortgage into what amounts to lifetime servitude to the holders of the mortgage.
All the plan does is perfect this debt-serfdom. In a truly capitalist, transparent, free-market economy in which assets were always marked to market, then mortgages that are grossly misaligned with the market value of the house would be written down and the mortgage holders forced to book the loss.
Over-leveraged lenders, i.e. the "too big to fail" banks which dominate the U.S. mortgage market, would see their capital reduced to zero by the writedowns. They would be declared insolvent and liquidated. Their shareholders and bondholders would book losses.
But these losses are unacceptable in our crony-capitalist/cartel-capitalist Status Quo, so the "solution" to systemic insolvency is to manipulate the debt-serfs to keep paying, and thus keep the unicorn-and-pixies valuations of real estate on the banks' books at full value.
This is the same game that Japan's lenders and Central State have played for two decades, and it remains the heart of their failed policies and decaying economy. In Japan, lenders papered over their bad debts with all sorts of back-door machinations: they extended new loans to debtors so the debtors could continue to make interest payments, they created zombie accounts filled with delinquent loans that were still kept on the books at full value, they wrote new loans at near-zero rates so interest payments were lowered, and so on--the same ploys and games being played by the Federal Reserve, the Federal government's housing lenders (Fannie and Freddie) and the banks.
The propaganda machine is running at full throttle, of course, with the usual parade of toadies and lackeys trotted out to say what a great and wonderful thing this plan is for poor homeowners. But industry analyst Ken Rosen inadvertently revealed the real motivation for the plan: to keep underwater homeowners from "walking away" in so-called "strategic defaults." underwater homeowners thrown lifeline by Obama (Mercury News).
Why is strategic default anathema to the Status Quo? Because the abandoned house will eventually have to be sold on the market, and at that point its true value revealed. The mortgage holder will then be forced to book a stupendous loss, and the inflated-paper "asset" on the books vanishes.
The Big Lie here is implicit: "your house will someday come back in value, so hang in there, debt-serf." No, it won't. The bubble has popped, and the mania has left town. Housing will retrace to pre-bubble valuations circa 1996-98.
As usual, the Plan is all about managing perceptions and political theater: we're here to help the little guy, the struggling homeowner; we are in charge, we have a plan, we're competent, this will fix the housing market.
Too bad they're all lies. Perception management is not the same as actually solving the underlying problem, yet perception management is the Status Quo's response to every problem.
The perfection of debt-serfdom is now complete. First, make student loans "necessary" for the "good life" and then make that debt permanent and unbreakable. In other words, institutionalize debt-serfdom and lifelong servitude to the financial sector.
The re-fi "plan" herds potentially rebellious mortgage debt-serfs into new corrals, with the incentive of slightly lower interest rates. The lifetime of servitude to financial Overlords remains firmly in place. That's the "plan."
The Plan has other flaws as well:
Got A Hundred Bucks? Buy A Home (Or Virtually Anything Else) Using 2,000x Non Recourse Leverage (Zero Hedge)
On the Administration’s Latest Potemkin Help Struggling Homeowners Plan (Naked Capitalism)
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President Obama is taking credit for a new government plan to "save homeowners."
President Obama is taking credit for a new government plan to "forever enslave homeowners."
Fixed it.
Do not forget this will also give a clear title to the banks who sold them off. This will kick all the state AG's out of the lawsuit for the idiots that take the financing. I think people I talk too are calling their decision to walk away a financial one instead of the moral one. Our property taxes are not dropping and alot of people aare taking a screwing by paying for a home that is worth less then they bought it for. Now I know some are using their home for ATM's and alot of them are already underwater big time. A neighbor down the street has two BMW's, jet ski's and a boat just left a month ago. Took it all with them and said screw the banks.
I see this re-financing as another ploy to cover the banks and kick out the AG's from sueing the banks. Gotta love our politicians and their suppot for the financial institutions that put them in office. Dam criminals.
I'm not sure that a refinance clears up a murky title trail. If there is a break in the chain of custody, the break is still there. Refiling on a broken chain doesn't automatically heal the sucker. And there's the question of all the local filing fees that were skipped by the break suddenly needing to be paid....
It’s not an economic accident that Americans are in debt.
The central bank cartel of private bankers is forcing debt on the American people in all areas of their lives.
It used to be, if you saved for several years, you were able to buy a house without debt.
It used to be, if you had a part-time job and saved your money, you could put yourself through college without debt.
It used to be, if you were working at an average job and your wife was a homemaker, you could afford to pay for your family’s health care without going into long-term debt.
It used to be that you could save enough without savings devaluation to start a small business, and if your business failed, you could start over without debt.
It used to be, before banks cooperated with retailers to keep prices on the rising edge, that you could buy what you needed without credit card debt.
Banks want to keep everybody on the ropes, so that no matter what line of work you’re in, you can’t succeed without going into debt. It’s a planned process. By removing the value of your savings through inflation and constantly raising prices, they force the people into debt and risk.
It’s a joke that parents of a new baby start saving for the little kid in a college fund. Every year money’s put in, the universities are moving the goal posts farther, so that by the time little J6P’s a freshman, his college savings won’t even buy his books. So he has to take a student loan – even to go to a state land grant college such as Cornell rather than Harvard or Yale as he’d dreamed. And when he graduates, the provost’s parting words are, Well, Joe, things are pretty tough now...
If our banker-controlled politicians don’t begin to turn the wheels back, an economic crisis is coming, iMO, that will force a popular uprising perhaps before the 2012 elections, particularly if the Republicans pick a loser candidate for president.
well, looks like a 'loser candidate for president' is unavoidable, unless somehow RON PAUL gets the nod ! RON PAUL 2012 !
Look. The banks are NOT on the hook for these loans. The loans are all govt guaranteed so the taxpayers are on the hook. The vast majority of the borrowers (85%) have been current for the life of the loans. Paying the mortgage means that you are paying principal and interest. If your ltv is around 110 or 120 do you really want to walk away and risk everthing for 20-50k of negative equity? If you cant pay you cant qualify for the refi. If yhou cant pay and have negative equity then default. But dont confuse issues. The govt NOT THE BANKS are on the hook for these loans - Get the fact correct.
Back when the entire financial system was on the verge of collapsing due to the " SUBPRIME" crisis...bawahahah... the entire mortgage crisis included some 1.5 million homes that were in default. Remember the TARP bailout? Hank Paulson held a gun to congresses head and demanded 800 billion to back the MBS on these these 1.5 so called " SUBPRIME" loans. As it turns the money went other places as soon as they got their grubby hands on it...see here...
http://www.youtube.com/watch?v=-I92oNTmZow
Well here we are only 3 years later and now the 1.5 million " SUBPRIME" homes in default have turned into 3 million "PRIME" homes and with close to 10 million homes underwater the default numbers are going to double. There are currently over 6 million loans in America either currently in the foreclosure process or have been over 90days late. So the question I have is if the "SUBPRIME" crisis caused the whole financial system to collapse because of 1.5 million homes, what the hell are you going to do when that number hits 10 million "PRIME'" homes? You have already had to steal and squander about 8 TRILLION to cover yourselves thus far, how much more do you honestly think you can steal to cover the 10 million upcoming defaults? And you honestly think programs like HAMP are going to really make any difference? Just look at the percentage of modified loans that are already back in default and you will get you answer. It's very clear it's all about saving the banks and putting this debt burden on the backs of the American people through Federally backed programs. Essentially they are creating the bubble of all bubbles using the likes of insolvent Fannie Mae and Freddie Mac to mask their robbery. And now that they have picked the pockets dry of all of their fellow Americans and are running out of patriotic suckers to play in their Casinos, they wan't to lure foreigners over here so they can suck them dry as well by waving VISAS under their noses.. Simply stated the synthetic ponzi scheme that backs all of these mortages ie..MBS, CDO'S, CDS, Derivatives and so forth is the life blood of fractional reserve banking and without these gimmicks the entire system would be insolvent overnight... When the whole thing comes unraveled the Great Depression will look like a vacation and the lost decade in Japan will be only a hope for America. The Dr of housing bubble analysis sums it up pretty good here as well.
http://www.doctorhousingbubble.com/trifecta-of-keeping-the-housing-bubbl...
And I dont know anything I can do to change it. My philosophy is to try to teach people but also profit from it. I am powerless to do anything else.
"HAMP" -- well named: http://barbaramusser.com/wp-content/uploads/2010/06/HamsterWheelMan.gif
I'm holding out for principal reduction to what the current market value of my home is before I bite. In the end this plan here is just a scam to game closing costs and other fees from the homeowner and create a shiny new set of titles and deeds that aren't clouded by MERS or any other scheme they were using in the heyday. The deals will get better next summer before the election folks. Obama and his Democratic Congressional lackeys will be so far down in the quicksand at that point that the voter buyoffs will begin in earnest. Say it again: prinicpal reductions to current market value or no deal.
I think something like this will get pushed more and more in the next year, but it will probably come with a time commitment to live in the house (probably 3 years like the tax credit). Still, I think most people would take it. How would it work, meaning who would absorb the loss? Half government, half bank? I don't think many banks will do it voluntarily, and I don't want my tax money going to lower someone else's principal. I think that will be the sticking point on principal reduction. I think their plan is just to keep people paying down fixed mortgages and continue inflation at 3-4%/year and eventually the mortgage and home value will come together. Doubt they can pull it off smoothly though
They can't because everything else BUT home values is increasing in price. There is absolutely Zero mechanism to pass through inflation into home values for at least the rest of this decade.
In a capitalistic economy if you owe more than you are worth than you are the winner.
With winners like that who needs losers?
While I agree that a huge motivation here is to *try* to prevent meltdown of banks, this article is guilty of committing lies of omission for their own agenda as well. Here is what they omit:
- People were free to choose to take a mortgage.
- People were free to prepare a reasonable plan taking into consideration the potential risks involved in a mortgage(house value drop, job loss or compensation lowering).
- People still have the house at the end of the mortgage whereas in a lease situation they do not (so the author's analogy is false).
- People have low cost options for schooling that do not necessarily lock them into "debt servitude" for life. (I admit that a few fields such as medicine don't have viable low cost options).
While I agree that the motivations of many banking executives place their own wealth & power above the good of their countrymen (same with many of the politicians), this author seems to be outright denying any personal responsibility and seems to be the sort of person who espouses rebellion as a general way of life.
This aspect of the Federal Debt Plantation illustrates areas of human monetization that people never think about. This calls for an update on "Wage Slave 2012". People have been so indoctrinated into indentured servitude that they don't even feel the tug on their choke collar, anymore.
http://georgesblogforum.wordpress.com/2011/10/26/wage-slave-2012-update-10262011/
Ha Ha, scooped ya Charlie, I said this 2 days ago.
Bill Bonner:
<<“It was all on paper anyway,” you might say. But that was the paper that the baby boomers had hoped to use to finance their retirements. Seventy million of them are supposed to retire over the next 15 years. Few have actually saved enough money. Some looked to the stock market for the money they needed. Others counted on selling their houses.
Now, they’re in a jam. Stocks and houses have gone nowhere in the last ten years. These years should have been the “peak retirement savings” years for the boomers… when their earnings were peaking out and the beaches of sunny Florida beckoned to them like Lorelei on the banks of the Rhine.
But they blew it. They took their peak earnings… invested in stocks or real estate… or simply spent the money. Now, what have they got?>>
Good article from his The Daily Reckoning
As for me, I will take advantage of it. My house is $20000 underwater and right now I have a 5.75% 10YR Interest only loan with five years left. Getting the 30yr fixed under 5% will reduce my payment and allow me to pocket the difference. I then plan on moving into another house I own that is not underwater and rent out the underwater house for double the mortgage payment. Somehow tell me I am a debt serf in this situation. It would be great to be mortgage free but most of us with money enjoy leverage and if smart enough use it to make money. All of you people that see a bogey man behind each mortgage need to take a vacation here on Maui where I live.
Charles, what would you recommend instead of this?
I agree that getting rid of the debt is the answer, but it's not up to the president to force the homeowner to walk away, or to force the bank to write down a performing loan (I believe the program is only being offerred to those who are current on payments). If the homeowner is underwater and insolvent, then it is his/her job to walk away from it and free themself. Regardless of how underwater a home is, the family still gets to live in it and if they are paying off a fixed loan they will eventually own it and get to live in the home as promised. No one is forced to participate in the program. If you are underwater and broke, then walk away. But it's not the presidents job to force you to do so. If you want to stay in your home and can make the payments and don't care about its market value, then take advantage of the opportunity to lower your rate and payment.
I don't see where any harm is done here, unless they turn a non-recourse loan into a recourse loan without making that very clear to the refinancers.
Also, while all the ways it helps the banks it also hurts in at least one way. If a performing loan was being paid off at 6% and now it's lowered to 4.5%, then the original lender is losing out on 1.5%.
Once again, I have no idea why I'm bothering to comment but I disagree that this is necessarily a bad thing. While I'm neithera fan of the banks nor a fan of Obama, I'm certainly not going to jump on the side of the stupid either -- that is, those foolish many that purchased a house they could not afford.
On March 24, 2008 I sent the email below to ranking Senate Republican on the Finance Committe Alabama Senator Shelby, among several others on congressional finance committees begging them to implement a program that would achieve three objectives:
"Our politicians are pandering to the foolhardy and mindless instead of searching for solutions that seek the following outcomes: preserve the home values of responsible investors (by far the vast majority of homeowners in this country), recover tax dollars from those responsible for the inevitable bailout currently underway and construct the right regulatory framework so that future profligacy will be avoided."
Of Course the plan proposed below or one similar was never implemented. And the one being discussed 40 months later falls short of the mark. But I believe that we should hold people that stupidly purchased homes they couldn't afford should be left on the hook and the banks should have skin in the game.
From: xxx@yahoo.com>
For those of us who played by the conventional rules for buying a home – saved money for the appropriate down payment and borrowed an amount that did not exceed our salaries’ ability to service – we look at the current housing crisis and wonder how foolish we were as lax lending standards permitted unqualified borrowers to ultimately devalue our primary asset and as irresponsible lending practices by regulators and bankers fueled the bubble without regard to the disaster they were creating.Subject: Housing Crisis -- "Protect our Property Values" Plan
To: senator@shelby.senate.gov
Date: Monday, March 24, 2008, 3:39 PM
Right now politicians are sitting around either talking about ways to save the irresponsible borrowers or devising plans to bail out the banks that recklessly inflated this bubble.
Our politicians are pandering to the foolhardy and mindless instead of searching for solutions that seek the following outcomes: preserve the home values of responsible investors (by far the vast majority of homeowners in this country), recover tax dollars from those responsible for the inevitable bailout currently underway and construct the right regulatory framework so that future profligacy will be avoided.
Painful as it is to say, to protect responsible borrowers’ primary asset, politicians must bail out reckless borrowers. In the absence of this assistance the responsible parties will continue to suffer as their property values unjustly fall as the supply of homes from defaulting sub-prime borrowers floods the market.
Politicians must collect taxes from the irresponsible parties. To do that they need to design a special federal real estate tax (SFRET) whereby “qualified” sub-prime borrowers (i.e., those who can continue paying their mortgages at their current rates) will be permitted to keep their homes and maintain their mortgage payments but accumulate tax liability payable within 20 years or when the property is sold or transferred, for example, to family members. The SFRET payable will be a percentage of the borrowed funds and will grow each year but be capped at 50% of the funds borrowed and be payable within 20 years. (After 20 years SFRET homeowners can still own their SFRET properties but will have to refinance and pay taxes due.) The longer those SFRET home owners hold their homes the greater the percentage they will pay. Thus there is an incentive for SFRET homeowners to get their financial house in order quickly, sell their SFRET properties and purchase properties unfettered by SFRET tax liabilities.
(In the immediate term the SFRET solution will stifle the over-supply of homes on the market -- because SFRET owners will keep their homes instead of defaulting on their mortgage obligations -- which will restrain further downward pricing pressure on home values. SFRET property owners will have to wait till their properties appreciate enough to repay their loans and pay their SFRET taxes. In the intermediate term as home values start to move up in value SFRET property owners will undoubtedly try to sell their properties tempering another potential real estate bubble from developing. In the long run when property values have appreciated to the point where SFRET properties can be sold and SFRET taxes repaid in full without any risk to the financial system, property values will reflect the current demand and supply conditions for real estate.)
The treasury coincident with the introduction of the SFRET program should float SFRET bonds based on the present value of future SFRET receipts. Wall Street firms who helped fuel this bubble and who are now enjoying the current Federal Reserve bail out should be obligated to purchase these bonds which will carry an interest rate 100 basis below current treasury bond rates.
As with any program that holds accountable the responsible parties, borrowers who are right now counting the days, weeks, and months before they face their inevitable default and bankruptcy will still find this SFRET program unfair even though it bails them out of bankruptcy, permits them to retain their homes and gives them the opportunity to enjoy the appreciation of their home in the long run. Essentially, those that find the SFRET unfair are looking for a free-ride – a bailout without consequences. Those that find the SFRET solution unfair have two choices, declare bankruptcy or sell their homes quickly to get out from their growing SFRET liability.
It's funny, I read Zero Hedge regularly about 3-4 times a day. The site and information are phenomenal, truly one of a kind. The material is not watered or dumbed down and there are often links to interesting (albeit biased) reports, research, studies, white papers, etc. from one so-called authority or another on a variety of financial market subjects. I'm truly a smarter person and more knowledgeable investor from reading the material on this site. You feel like you're part of some unique informed group getting a regular dose of information that is either not covered elsewhere or is covered elsewhere but so badly diluted that no meaningful information is truly conveyed.
Then I read the comments people submit and am reminded of the quote that Woody Allen attributed to Groucho Marx: "I would never want to belong to any club that would have someone like me for a member."
There's a ton of criticism on this website and I've dashed off plenty. But criticism is easy. Complaining is easy. Whining is easy. Hating is easy.
I'd be curious to hear some solutions. It's not possible that the very same people reading the material on this site can't have ideas, unless they're merely reading Titles and by-lines.
Providing alternate ideas or proposing solutions to problems is hard. First, it immediately opens you up to criticism. Nobody likes being vulnerable. Second, it challenges you to be logical. (Given the ideas and programs coming out of Washington, NY, London, Brussels, etc., your ideas can't be any worse.) Third, it could demonstrate just how complex a problem really is to solve.
For example, cutting gov't spending by billions and trillions is a phenomenally good idea. But the consequence of doing it with the slash of a knife would put several hundred thousand federal and state workers out of work, depressing middle class wages even further. Crime would likely rise. And companies would fire and replace higher cost employees with lower cost employees. There is a solution out there, but the debate has to be meaningful and constructive.
Anyway, that's my 2 cents for today.
My parents lost everything they had because they drowned themselves in debt to buy luxury cars, a pool, house renovations. They don't have the house anymore, the cars, or the pool. My mom would get a new Lincoln every few years and my dad is a chronic gambler. They don't have anything now and they rent everything and overpay for it just like they were underpaid when they sold their house during the peak of the real estate bubble. They scrape by now and don't have anything to show for it. It's their fault and the banks preyed on them and were the enabler. When the government gets involved refinancing debts this is the kind of lifestyle it'll support. Enjoy getting stuck with the tab.
Yawn. Why the hell should owners get a principal writedown? A rate reduction makes sense (even though it ultimately is funded by taxvictims), but welfare in the terms of a gift of tens of thousands of dollars would be... welfare. I hate the banksters, want them to all go to prison with their pal Madoff. But tired of the govt picking winners, giving them windfalls at MY expense, whether tax dollars or resultant inflation boosting prices without boosting my paycheck.