Aren't 10 million Foreclosures "too big to fail," Ben?

By Frank Louis

I about croaked when I was driving my car and listening to Ben Bernanke, on my radio, address the Regional Fed in Dallas this week. He started his address by stating; "Fortunately, today the financial crisis looks to be mostly behind us, and the economy seems to have stabilized and is beginning to grow again. But we are far from being out of the woods." Perhaps Ben's dad never took him camping or hunting in the woods. Who knows? But one thing I can tell him for certain is; "Ben, if one is not yet out of the woods, their crisis is not over." This nation's founders prayed for guidance before making addresses such as this. That is a good way out of the woods.

I think he, like any talking head you might see or hear expounding on the topic, has it both backwards and wrong. He went on to say; "The financial crisis that began in the summer of 2007 was an extraordinarily complex event with multiple causes. Its immediate trigger was a downturn in the national housing market that followed a long period of rapid construction and rising home prices." No, if you were there, investing in real estate, putting your 20% down, buying property because you were hard working Americans, this was not the trigger of the crisis. The crisis is the downturn in real estate values due to the numbers of fraudulent transactions many realtors and mortgage lenders pulled off in a market that had its moral compass stripped from it due to the likes of Barney Frank and the Community Reinvestment act among other things. It was a result of straw buyers, not people who made down payments. Prices did not fall because of them. The crisis (the downturn) has ripped trillions of dollars from hard working Americans and some of us want our money back!

Then he babbled on further; "The housing slump in turn brought to light some very poor lending practices, especially for subprime mortgages extended to less-creditworthy borrowers. Relative to the global financial system, the market for subprime mortgages was quite small, probably less than 1 percent of global financial assets." First, let me say that the suggestion that the subprime mortgages amounted to "less than 1 percent of global financial assets" is one of the most irrelevant statistics I have ever heard. So what? Ben, you and all of the talking heads are missing the point. No, in fact I would venture to say that you are not just missing the point, you are ignoring it. The point is real estate values were run up by thousands of fraudulent "buyers" (No, the really were not buyers were they?) who never paid a penny for a down payment or even made a single payment on their "loans" once they were made. These "investors" were often realtors, mortgage brokers, and other professionals in the field, flipping with straw buyers (fake buyers). It is hard to find this information as few media are reporting it. But if you spend enough time searching the web for overlooked news articles, you will find that I tell you the truth. I will cover more and more of this as the weeks progress.

Ben went on to say; "originators of subprime mortgages did not typically retain the loans they made on their own books. Instead, the mortgages were packaged together in complex ways, sometimes with other types of loans, stamped with a seal of approval from one or more credit rating agencies, and sold to investors worldwide, thus — it was thought — broadly dispersing the underlying risks"... I somehow miss the Biblical principle here; maybe Mr. Bernanke can explain it to me. This is really smoothing over of the facts too. I beg to differ; the folks who committed these frauds knew full well that they would keep their commissions regardless of what happened to the loan after the closing. Mortgages were not "repackaged," they were dumped on unsuspecting folks who had no clue. There was no disclosure on the part of the lenders as to what was really happening. In 2006, most of us had never heard of sub-prime mortgages. We were stupidly putting our 20–30% down and trying to earn an honest buck buying real estate for our families and our selves, fixing places up. They call it work. However, it was a Ponzi Scheme and we were left holding the bag. Do you think folks would have put 20-30% down on property if the truth of how this was being done was "fully disclosed" to them by the industry. I doubt it.

This is also the largest wealth distribution plan ever. Face it, if you put 20% or more down and bought property after 2002 or 2003 it is most likely upside down now and your down payment plus several tens of thousands of dollars more are gone. You may well be on the hook for it as well. Maybe you will owe the bank for this real estate and when you die. Your family will be left with less than nothing. Seriously, something to think about.

Foreclosures, cash for keys, and short sales are not the answer. My whole purpose in writing these articles is to hopefully assist in people seeing this fact and then getting something done to fix this situation. The math associated with foreclosing and short selling is bogus. It just does not work and in future articles I will tell you in detail why it does not. Cash for keys is a sick joke as are every other program I have heard of that purports to solve this crisis. You constantly hear about people who "overbought." Believe me these people were not the problem. If they (we) were filling out real loan applications and putting hard earned money down, they (we) were not the problem. They (we) were taken.

Now, the bank wants to take our properties, "sell" them to someone else for a fraction of what we paid for them and leave us broke and perhaps in debt for the balance. Tell me; why not let these people keep the properties, regardless of them being investment or owner occupied or second home or whatever. If the value of a few houses in the neighborhood goes down, so do the others. The ripple effect, it is happening now. So, just stop it. It really has nothing to do with write-offs. Banks get far less in a foreclosure and usually pay the courts and lawyers $50,000 or more to get it done. There is no excuse. Mr. Bernanke needs to wake up as do several others.

I have invented 2 plans to virtually halt the housing crisis overnight. The "short keep," and "cash for keeps." Please let me know, Mr. Bernanke, why not the "short keep," why not "cash for keeps?" Why not let people who were credit worthy when they qualified to buy these properties, even at those higher prices -people who put their down payments on the table- keep the property for what the bank will get for it in a foreclosure, maybe even a bit more? Maybe give them a cash incentive to keep it rather than just walk. You know this is the only way. No stupid trial period, no application, no temporary modification. Just "mark to market" the values and go on. The banks' "investors" will be better off in the long run.

If I am wrong, please let me know. You know, as a rule, people can make that lower payment. Across the board, if you had put skin in the game, your loan balance should be lowered to the current "short sale" value, end of story. You keep your property; foreclosures come to a screeching halt the next day. On investment properties, the cash flow will again be positive, hey, we can afford to keep it.

And, if you have already lost your property then the banks need to refund your down payment and the people who wrote up the transaction need to return their sales commissions. This solution is not mentioned though, ever. And I will tell you why right now. Nobody will make a penny from this. No, not one sales commission, not one broker fee will be collected. And that is why, my friends, we have to demand it. Ever notice, everyone talking about the problem on TV or on the radio is the problem? They are all somehow in the real estate business. They all make money from short sales, foreclosures, and cash for keys. Not from letting you and I keep the property for more than they will get for it if they take it and try to sell it. Just think about this point. If I am wrong, tell me. Investment property, owner occupied, whatever, it does not matter. If you paid to play then you should be able to stay in the game. If you did not pay, you're out; plain and simple.

My plan is not about keeping the very people who helped create the crisis in the real estate ownership business. Not at all. And, oh yeah, let's see the professional associations of realtors and mortgage lenders start clambering about bringing the "rotten eggs' in their industry to justice, paying back commissions on sales that were frauds, maybe going to jail. Heck, I sold shoes and small appliances as a teenager and worked on commission. You know what? If the sale fell through, I had to give my commission back, even if I had already been paid for the sale. I got docked. Why are these people exempt from this practice? Too big to pay back?

Finally, Mr. Bernanke made perhaps the most upside-down comment of the whole speech when discussing the stability of the financial system (banks). He said: "We have yet to see evidence of a sustained recovery in the housing market. Mortgage delinquencies for both subprime and prime loans continue to rise as do foreclosures. The commercial real estate sector remains troubled, which is a concern for communities and for banks holding commercial real estate loans."

I agree that the high unemployment rate has something to do with this, but Ben, you are TARPing the wrong folks. The people are the banks. Not the bank officers, not the Fed; the people. If we have all of our wealth stripped from us, we will not have any money left to put into the bank, we will no longer be players in this economic market. And many of us were serious players. Not the ones the media want us to hear about; those poor folks "wanting the American Dream." Believe me, to own property is not a dream; it is something you save for and earn. Barney Frank should tell Fannie Mae and Freddie Mac this secret too while we are at it. As long as the current system of foreclosing and short sales continues, property values will continue downward and, believe me, even people who can pay their mortgages will stop. They will ask themselves "Why am I paying $500,000 for this house if it is only worth $100,000?" Think about it.

Enough policy statements, enough talking about the process and half-baked programs that only make the situation worse. There are over 10 million foreclosures lining up at this very minute and more to come. Stop them, I just told you how.

© Frank Louis