There is no Banking (or Real Estate) Crisis. It’s an Accounting Mistake (Part I)
Bank & Insurance Paying-off Same Mortgage
How many names can you think of for ‘home loan?’
Mortgage. Securities. Credit-default-swaps?
Different names, same loan. The titles may have confused the accounting as we explain.
The lender asked the homeowner if they would like a loan. Let’s say it’s for $100,000.
The homeowner said yes.
Lender loaned this loan and now called it a MORTGAGE.
The lender took this $100,000 mortgage and sold it to a Wall Street bank.
Banks packaged this same mortgage and called it a Real Estate ‘SECRURITY.’
Banks felt very insecure about this security, so they asked insurance companies to insure this security against default (should the homeowner stop paying their home-loan).
Insurance companies agreed to insure this loan by CREDITING it against DEFAULT and so they starting calling it a ‘CREDIT DEFAULT SWAP.’
Different names by different companies but it’s still the same home loan.
Accounting Mix Up
Now for the accounting mix-up. Wall Street stepped in and counted the banks (real estate) Securitized Mortgage as $100,000 asset. Wall Street then went and counted the insurance company’s Credit Default Swap as a whole new $100,000 asset as well. So Wall Street said we have two assets for a total of $200,000 worth of assets ¬ (one from the bank and one from the Insurance company). But we don’t. They are just counting the same asset twice - under two different names.
Simple Answer
Now for the interesting part. Let’s fast forward. Here we are today and both the bank and the insurance company are now writing off their respective ‘securities.’ This means they are actually writing off this same home loan.
Let’s say each industry has now written off 35% of their own securities. Combined, they have actually written-off 70% of this $100,000 loan. This write-down is recorded by each industry separately, but never recognized collectively. All we are asking is that we take a second look at this issue. (We will find some kind of duplication, for example, there were $65 trillion in Credit Default Swaps at the height of the market or the equivalent of 5 insurance policies for every one of the real estate loans made.)
Securitized Mortgages Hid Duel Write Down
No one sees this duplication because mortgages have been securitized (which divided the mortgage into little pieces and sold them off to different buyers). This has made it nearly impossible to follow the individual mortgage through its securities process. However, collectively, these securities can be traced by following the industry as a whole. Looking at the industry shows us that banks have written-off several times more than the actual real estate value from which these securities were issued.
Real estate has fallen (on average) 35%. Yet securities are selling for just 20 cents on the dollar (they are trading for a little more now). This gives us a 50% disparity between real estate and their corresponding securities. This leaves much of the banking crisis looking more like a misreading of our securities rather than the true measure of collapsing real estate.
(And now the Good News: AIG has far less liability then investors realize and so, it’s also worth significantly more. Ditto to our banks. Maybe we are getting a good deal on our bailout money after all? (I had re-written this during the AIG Bailouts).)
No More ‘Underwater Homes.’ No More Toxic Loans.
The conclusion: WE CAN recoup a great deal of this extra value by simply running the money through the entire mortgage system once again, starting with the homeowner. The ‘OTHER WAY’ to get rid of all ‘toxic loans’ would be to refinance all ‘underwater’ homes (that owe more than they are worth). No More ‘Underwater Homes.’ No More ‘Toxic Loans.’
The benefits of refinancing homeowners (in place of banks):
•It cost about 5% to 10% the price (of the TARP program) and paid in weeks (it takes to refinance owner) rather than years (as required by TARP). (This was rewritten during the TARP debates legislation)
•The securities are paid in full.
•Banks are refunded with rebates of 30% to 70% in return for their (excessive write-downs on the mortgage) securities.
•And it’s a market based solution rather than a gov’t takeover of the banking system.
Helping homeowners in place of banks cost less, it’s a lot faster, and much more profitable.
ACORN just released a report giving us the best news of all: both banks and Washington have now committed to refinancing most distressed homeowners anyway. They even have the money budgeted to do so. There is no need for further legislation or money. Just show them this ‘secret’ of the mortgage duplication and the world will finally see the bottom of this problem and all the value just waiting there for us to tap.
End here for abbreviated article. Include following for extended article.
Financed with Write-down
The best part of this approach is that banks can simply pass-off the write-down they already made on the (mortgage) security. Banks need only credit this same write-down onto the homeowner’s mortgage.
This means no additional capital needed to refinance homeowners into lower mortgages. The bank can instead take these write-downs and use them like a new capital pool for lowering home mortgages. This ‘new capital’ could replace gov’t funding now slated to help pay-down the homeowner’s mortgage. (This saves gov’t from spending on both the bank and homeowner.)
If the bank made a 70% write-down on their securities (for example), they would pass off 35% of this onto the homeowner. The homeowner gets 35% knocked off from their mortgage. The bank gets Refunded the (35%) “Difference.” (The ‘Difference’ is between the 70% write-down they took in our example on the securities and the homeowners 35% lowered mortgage).
It is nearly impossible to match each investor with each loan. So the simple approach would be to apply this industry wide offer. It would be for say a 35% write-down on all (underwater) homes (mortgages).
The lowered mortgage converts these write-downs into new spending power for the homeowner. The homeowner now has this new found spending power. This transforms our struggling homeowners from banking-liability into America’s next wave of economic activity. It’s the ultimate stimulus package.
This may sound ambitious, but let’s compare it to the old TARP approach now being repackaged by Pres. Obama. Remember the huge debt reduction we saw when we combined the write-downs by the bank and insurance company? They each wrote-off just 35%, but combined, they equal 70%.
Well, this added leverage will work against us when we see it in reverse. (This is what we see of the TARP approach). We have to pay-off 200% of the loan amount if we try and pay-off the banks and insurance companies ‘securities. This is what we have done when the Federal gov’t bought $2 trillion worth of real estate securities and then went and tried to bail out the insurance companies ‘credit-default-swaps’ too. This is what the gov’t is doing now. Basically, we paid off the same debt twice. Of course, this will create inflation. You just doubled the money spent on the same product. And yet, this has not even touched the homeowner’s debt.
The homeowner’s mortgage is categorized as an entirely different debt altogether. This is why the gov’t has also set up a whole other fund to help homeowners. This leaves the gov’t trying to bailout the homeowner, the banker and the insurance company. Put another away, the gov’t is trying to pay off the same loan 3 times. This is why the bailouts have such little impact. Each dollar can only cover one third, to one quarter of the total ‘paper’ debt.
Let’s contrast this to helping the homeowner. Make the mortgage affordable to the homeowner. The bank and insurance company have now automatically covered their entire debt. Helping American’s homeowner takes a fraction of the cost and yet everyone gets this instant performing asset instead of a crushing financial liability.
Yeap, this financial crisis appears to be more an accounting glitch rather than about falling real estate prices. The upside is that solving the crisis may be as simple as fixing this glitch. All we have to do is re-state the full value of all these write-down’s by the banks & insurance companies. We will then see that all this liability was written-off long time ago. We can do this by simply refinancing the homeowner into a more affordable mortgage. The gov’t gov’t has already set aside the money for the banks to use for this. The banks are now working to do this anyway. The only difference is we can be sure that this time, our efforts will work.
These are some of the issues outlined in the book: ‘The Trillion Dollar Discovery.’
John ‘Raghu’ Giuffre is a NY Realtor (presently in Hawaii) who has worked with Guerrilla Economics on a new mortgage system that will help much of this real estate crisis. It was in outlining this mortgage program that many of the issues like those discussed above were discovered and became the book: The Trillion Dollar Discovery.
The book is available at lulu.com. Search under Trillion Dollar Discovery. Here’s the link:
http://www.lulu.com/content/paperback-book/trillion-dollar-discovery/6491549
There will also be information on our website: roopa.org.
