Tuesday, 23 November 2010

Foreclosure crisis

For the readers who also follow the economy news, at some point you're going to hear about the "foreclosure crisis". I've been following this for a few months now.

If you want to understand it, a good place to start is here, with Mike Konczal's careful diagrams.

But the essence of all this is, that when it comes to rights over houses, which are pieces of land, it's no good just agreeing and handing over money; you have to actually do things. You have to actually do the things that the law says you have to do, in order to give somebody ownership of a house, so that if the loan secured on it isn't paid back, they can sell it.

The same applies to something called New York Trust Law. When you create a thing called a trust, so that it can own things, so that people can buy some sort of share in the income that comes from the things it owns, you have to actually do the things you are supposed to do and you agreed to do, in order to set it up.

If you don't, it's not that you have to fix the things you didn't quite do correctly. You can't fix them, and it's useless to try, because the trust never existed. It hasn't even evaporated: it was stillborn.

It's like computer programming. It's that strict, and the notion of 'a technicality' is utterly contentless. Getting the paperwork right is the heart of it; there are laws about how you do these things, which you have to obey, or the things don't happen. If you get it wrong, it's not just that someone can sue you: it's that it doesn't work. Lawsuits come later. Silly propaganda isn't going to help you. You don't own what you said you owned, you didn't sell what you said you sold, and it doesn't do what it says on the tin.

It doesn't sound so dramatic, unless you know there's trillions of dollars of this stuff. Who the hell even knows what a trillion is? [Be quiet, Ghost]. The recording devil of History's Greatest Foul-Ups will blench at the scale of this.

This is what the term was invented for:  EPIC FAIL.


ghost said...

Actually having just come back from Ireland I was going to email you about this anyway.

Possibly this question is too simplistic or just plain wrong, but:

Is all the money still in the system? ie it's still there it's just that now no-one's entirely sure who it actually belongs too?

Or has some genius come up with a way of actually destroying money in this process somehow?

msHedgehog said...

No. Essentially, it's been destroyed - put into a furnace. There are some people who've done extremely well out of it (google "William K Black" and "Control Fraud", and look out for his video explanations) - but essentially what this kind of thing does is destroy money.

ghost said...

Here's the bit I'm stuck on.

Say I buy a house from you for $1,000,000. I self-certify that I am an internationally renowned tango dancer with an annual income of $500,000 and the bank rather helpfully believes me. They give you the money. Let's say I am actually a penniless tango dancer and I default on the first mortgage payment. Let's also say that the house you sold me is completely worthless. The bank looses $1,000,000.

What I can't figure out is what happens to you? Surely you still have $1,000,000? Sure you could use it to buy a bigger house and loose it in the same process, but that should mean that someone else now has your money + whatever you borrowed from the bank?

msHedgehog said...

Most money isn't cash; it's created and destroyed all the time. That $$ is just something another bank owes me. If that bank is insolvent, which unfortunately is extremely likely when there's been a bubble and systemic failure on this sort of scale, it's basically gone.

LimerickTango said...

Ah "technically". As in "technical discussions" are not "negotiations" especially when held with the IMF.

ghost said...

@MsH - :Lightbulb: Ah, got that part now thanks.

I think the English and Irish Governments were basically successful in keeping their banks solvent - does that mean the money wasn't destroyed in those cases?

There is no bail-out package! ;o)

msHedgehog said...

No - they only succeeded in keeping them *liquid*. Sadly, the Irish banking system is insolvent, and that's why the Irish government will probably have to default in the end. Which is what happens if you are daft enough to guarantee the debt of someone who's (a) insolvent and (b) much, much bigger than you are.

The UK government is in a rather better position, not because its banking system is solvent, that seems vanishingly unlikely to me, but because it has its own currency, in which its own debts are denominated, and which can fall in value, dramatically reducing the real value of those debts. It hasn't quite issued such a drastic guarantee. And it also has all its debt on very long maturity so it has a lot of time to grow out of trouble (actually the only way out of this kind of trouble). Unfortunately it currently has a government that's financially totally clueless and pursuing the worst policy logically possible under these conditions, apparently calculated to cause the fastest and largest economic contraction it can. On the other hand, that may not last.

I summarise, obviously.

ghost said...

Thanks. Any idea what would happen if the Irish government dropped out of the Euro "rebooted" the pund? (ideally before they actually borrow large amounts of euros from the IMF)

msHedgehog said...

Check Paul Krugman on that one (NYTimes blog and various articles) - As far as I remember he reckons that's exactly what they should do. Basically because all the supposedly bad consequences of that will happen anyway or already have happened, and the upside makes it a much better idea than the alternatives. Also have a look at Yves Smith's blog today (same place as "Greece Not Ireland, Ireland not Portugal, Portugal not Spain, Belgium TBD").