Thomas Jefferson said in 1802, “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property – until their children wake-up homeless on the continent their fathers conquered.”
And here we are. Hedge Funds are becoming the new, the faceless: Land Lords.
Banks bet that a carpenter, for example, cannot pay on a $350,000 dollar mortgage when the building boom was halted after they, the banks, cut the credit. That is OK for the bank is made whole by loan failure insurance called a CDS or Credit Default Swap. It is called that confusing name ‘swap’ because this insurance cannot be called ‘insurance’, because insurance is regulated. Perhaps the bank gets paid a premium when the carpenter is 90 days late, or perhaps when the carpenter and his family are evicted. The CDS world is not regulated. Anything goes. So if the the CDS premium only pays the bank a hundred grand, that is OK, the bank takes out as many CDSs as it likes, say 40, and gets a big payoff when the carpenter moves out. The CDS world is still unregulated today. Confusing? It is meant to be.
But so sad, there is no one to buy the house at $350,000, or even $200,000. No Problem, the bank has made its money already and did not have to wait for the pesky loan to mature. It now sells the house to a hedge fund for thirty cents on the dollar and voila. The bank is done. No maintenance problems. Next?
I have told this tale simply, for actually there are likely three banks involved, the note holder, the ‘investor’, and the servicer. The servicer is the bank that collects the money every month. The ‘investor’ may not be a bank at all, perhaps the bank gets a pension fund or municipality to put up the money. And you might be right if you have suspicions here…. sometimes the ‘investors’ do not get paid back when the loan fails, hey, I said this was unregulated. But the servicer has made a fine profit.
But wait. Isn’t that funny language? Is ‘servicer’ farm speak? Who is getting serviced?
Well it seems like just about everybody but the servicer is getting serviced. It is unregulated. Foreclosure laws vary from state to state. Bankruptcy laws are constitutionally mandated to be the same everywhere… but not foreclosure. Interesting huh? Anyhow, investors may lose. The house-holding families lose. The neighbors lose. The communities lose. And if small businesses used their houses for collateral as almost all did, then the job environment loses because the businesses have negative collateral.
Also the local governments lose, as taxable properties fall in value, cutting revenue requiring more lay offs. This is called a vicious cycle. But some bankers may get bonuses, and thus can play their part in the costly politics is money game as it selects who ‘represents’ and protects us.
Thomas Jefferson long ago saw America as the land of the yeoman farmer; the independent spirit informed by this beautiful land and concerned with the welfare of his neighbors. For he had seen the White House in Washington D.C. burned, in his lifetime, and had seen the boot of imperial oppression and its effects. Jefferson’s America was composed mostly of farmers who did not need explanation that when a bull mounts a cow in order to make a calf it is called ‘servicing’. And conceptually at least, a bull mounting a cow is so much easier than mounting a hard drive today. How times have changed. And how that fear of Jefferson’s, that American children wake up homeless has come true.
And Jefferson’s nightmare is just in the first act. Who will buy the houses from the hedge funds?