Episode-942- Listener Feedback for 7-16-12 — 36 Comments

  1. Isn’t it interesting…,

    The “middle finger” from other countries of the world to the U.S. monopoly on economic policy is tantamount to the American citizens middle finger to the very same liars and thieves.

  2. These investor groups who would get screwed on this imminent domain deal, have all but quit lending already. That’s why the residential lending market is already in shambles. As I have found as I am currently making a purchase, the only Lenders are FNMA, Freddie Mac, FHA for the most part. Even if you go to a local Credit Union, they are not the Lender they just service the loans and broker the deal.

    One other thing to add is the Appraisal is king and controls the lending market. On my current purchase, the bank didn’t like the deal I got on my purchase so they sent they refused the initial appraisal, and required new comps to be pulled.

    Lenders are also requiring more and more repairs to be completed on the house prior to the loan closing (unless it is a renovation loan which is its own animal). If the appraiser notes any flaw the Lender can and often will reject the loan or require the repairs to be completed prior to close. This may be something as silly as grading around the house.

  3. Forget Honduras. I’d be ready to move, if necessary, to a town in the south east of this country with such a group. Thanks so much, Jack, for playing the speech by the Mormon leader. I learned so much about prepping from my Mormon friends and neighbors when living in Idaho. BTW I lived in a national forest/gold mining ghost town with only a Mayor, and the sign that welcomed folks said, “The least ruled is the best ruled”.
    And I wonder if you’ve seen the short film about liberty produced in 1948 by Harding College in Searcy, Ark.? ( This was my husbands alma mater.) If the link doesn’t work, it’s Youtube…..Make mine liberty.

  4. A couple thoughts about the loan eminent domain thing: (i.e. something stinks)

    1. As interest rates go down, the present value of an annuity (e.g. a series of loan payments) goes up.

    2. The communities in the given example will be paying “fair market value” (according to both the article and the Mortgage Partner’s Resolution site). Any thought that the mortgage holders are taking a bath is misleading. At worst they will be realizing already recognized losses. Further, with the interest rates artificially low (and as long as those rates are held this low), the FMV of these loans is no doubt higher than it otherwise would be. Or to state that another way, as long as the Fed artificially suppresses interest rates, it is implicitly also artificially inflating annuity asset (i.e. bond) values.

    3. The ED thing means trusts who cannot otherwise sell the loans will be able to exit those positions at a time when interest rates are ridiculously low (and annuity FMV’s are ridiculously high); how convenient.

    4. Who are the trusts? Who benefits from this? Well it’s the organizations that manage the mortgage backed securities. And the people who own the bonds that make up those MBS’s. Whoever that is. (lots of large financial institutions own those MBS’s)

    Based on the article Jack read, they will be focusing on loans that are current. That’s convenient for us b/c we don’t have to worry about variances from foreclosure risk. These are the “best” loans. Also according to the article, they will rewrite the mortgage to an amount that is in line with current market value for the house and sell that to a funder. From the MPR site “funder’s” will fund the new loan.

    So given all this, what kind of loans will be done?

    A loan such that the present FMV of the remaining payments is less than the current value of the house. OR one in which the home owner kicks in enough to make up the difference.

    Let’s run an example to illustrate changing annuity values:
    A loan was given for 200k at 6%. The initial payment was 1199.10. The loan has been serviced regularly for 6 years, and now 24 years remain on the loan. The original value of the annuity is 200k. The current outstanding loan balance after 6 years is ~$182k. Let’s speculate the current FMV of the house is 185k. Now, 6 years later, the new market rate is 5%. That means the present value of the loan is almost 201k (it went up!).*

    The city heroically “forces” (through eminent domain) the trust to accept a valuation at 6% (which the trust doesn’t fight) when the current FMV is 5%. The trust could sue, but they realize the current valuation is temporary, lasting only until the Fed quits suppressing rates, so they don’t pursue the valuation difference caused by the 1%. The beneficiary of the trust is the winner of the monetary policy game, getting a valuation at 6% when it should be (without the Fed involvement) 10%. The sheep cheer because they think beating 5% was such a great win against the financial institutions. The financial elite know that the dramatic 1% “loss” was ruse.

    I’d like to know who is going to fund these loans. Probably the same banks that will securitize or sell them to the Fed govt. At best this is a crackpot scheme to move dollars around so that firms like MRP and banks can collect more fees for the new mortgage transactions. In the example above the homeowner can now refi the 182k (and pay PMI since the loan is > 80%, winner winner chicken dinner for the insurance companies).

    At worst is a more malicious scheme to divert more wealth into the hands of the financial few (again, through ever lower interest rates) before the whole thing peters out. Around and around we go…

    *It’s worth noting I’m not accounting for the negative value of foreclosure risk. However, I would argue those models used for that valuation probably have changed very little, so the difference for the purposes of illustration is (I’m guessing) negligible.

    • Correction:
      “A loan such that the present FMV of the remaining payments is less than the current value of the house. OR one in which the home owner kicks in enough to make up the difference.”

      Should read:
      “A loan such that the present FMV of the remaining payments is MORE than the current value of the house. OR one in which the home owner kicks in enough to make up the difference.”

      Also on further thought I guess the other situation in which a deal like this will get done, is one in which the FMV of the house is taken into consideration in the model for the value of the associated mortgage asset. My guess (and it’s only a guess) is that almost never happens. Bond values are based on a lot of things, I’ve never heard of the value of the underlying asset as being part of that equation.

    • This stuff is thick, I’ve confused myself. Original post was correct. (jack feel free to delete the incorrect correction) This deal only happens if the FMV of the current annuity is < FMV of the house OR less than the outstanding loan balance (which is out of question since rates have gone lower, it won't be).

      Other scenario is the FMV of outstanding loan is greater than the FMV of house, but the buyer kicks in the difference.

      Reason being the new loan has to cover that amount or the financial institution can go to court to fight the eminent domain offer of less than FMV for the annuity.

      I'm having trouble seeing another scenario in which this kind of deal happens. If it does someone (not the Mortgage Resolution Partners, banks or fed gov) is going to get ripped off.

    • I’ve done some more research on this.

      There is a paper written by a lawyer here that outlines how such a plan would work. Skip to section III.

      He explicitely details the municipality to “…accept a ‘short’ – that is, discounted – repayment…”. So in his detail he speculates on the municipality eating the difference. This is in contradiction to the claims by the Mortgage Resolution Partners that no tax dollars would be used. In addition to the possibilities I list above, one more possibility is some govt covering the diff. I ignored that since the MRP site clearly states no taxes to be used.

      Also in that paper he talks about purchasing the the mortgages at FMV with specific FMV techniques discussed in “Appendix A”, but that appendix is empty. I have emailed him for details. It’s possible some part of ED law would allow a valuation that brought the cost of the asset to something less than the value of the house, resolving the “underwater” status.

    • Final point, the guy that started the Mortg Res Partners thing is a big contributor for Obama. So there’s that…

  5. Running a Free State project at a county level is brilliant. That would produce measurable results in a relatively short (10 years?) period of time.

    Great show.

  6. From the first article that I read on this:

    For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000. If a judge agreed, the program’s private financiers would fund the city’s seizure of the loan, paying the current loan investors that reduced amount. Then, they could offer to help the homeowner refinance into a new $145,000 30-year mortgage backed by the Federal Housing Administration, which has a program allowing borrowers to have as little as 2.25% in equity. That would leave $25,000 in profit, minus the origination costs, to be divided between the city, Mortgage Resolution Partners and its investors.

    This isn’t something that the cities would do for the “good of the community” – it’s a money grab that per their numbers would yield a 20% profit margin for the investors after paying rent to the city for the taking of the deed.

    The document said it would begin with a $5 billion effort in California that could grow to three million mortgages as part of a $500 billion multistate effort.

    The investors are looking at $1 billion to $100 billion in profits from this technique.

    • There is a Cornell lawyer supporting this, and he seems to be one of the original brain childs. I’ve read several things he wrote last night, and if you wade through my posts above you’ll see the only way this makes sense is if the City can win the case the loans are worth less than the new market value of the house.

      The problem I see there, is that the annuity assets that comprise the loan payments are not valued in the market place according to the value of the underlying asset.

      Or maybe they are. The Cornell guy argues that people who hold portfolio loans rewrite these all the time.

      In any case, I emailed the guy for his justification of valuations. I’d like to see something other than “its just common sense”, which so far is the whole of his argument for a valuation of a fully performing loan based on the value of the underlying asset. They would need to be able to show cases where loan assets are selling less than the FMV of the annuity because of the value of the underlying asset, and not just foreclosed loans. San Bernadino will be targeting performing loans.

      • Oh, and the obvious problem here is if you base the value of the loan on the value of the house, then in the example above why would the city win an argument the FMV of the loan is 120K? It should be at least 150K and maybe higher depending on the propensity of people to pay back those loans.

        You are spot on though this isn’t about helping anyone other than the City, banks and mortg res partners. (and maybe the cornell lawyer who I’m almost willing to bet is upside down on his house…lol)

  7. @TykeClone and Blueprint, first you know I am not defending this crap but I think if you want to do this based on numbers you need to get the numbers a LOT closer to reality. The spreads you are talking do not begin to reflect the reality on the ground in these cities, the numbers would likely be more like this.

    House purchased at 350K
    Loan for the house was say 330K
    Mortgage is 5 years old and home owner still owes about 320k
    Current market value of the home (not the mortgage) is about 170K

    This is very much in line with much of central California.

    So in this scenario the city and their partner would grab the house and pay the mortgage “off” at 170 and issue the home owner a fixed rate 30 year loat at 170.

    It is of course wrong but it is very appealing to the home owner, again your numbers above sound reasonable in say central Texas but not central California. Which is one reason it likely won’t happen everywhere but I would bet Florida, Nevada, Arizona and California will all eventually do something like this.

    • Jack you have totally missed my point. In your example the payment for 320k (at 6%) is 1978.52. After 5 years the FAIR MARKET VALUE of that loan asset (from the perspective of the Trusts) is ~$307k (assuming current market rates of 5%). By ED law, the municipality has to pay FMV for whatever it seizes. So the only way your hypothetical happens:

      1. The city gets to make a claim for some other valuation technique that puts the FMV of the loan at less than 170k. I’ve emailed the Cornell Lawyer for some support for his supposition that the value of the underlying asset can be used as a factor of the FMV of the loan asset. I don’t know of any example of that really happening in the open market. Do a Google search for “mortgaage asset valuation” and you can read up on different models and techniques for valuing those assets. None of them take into consideration the value of the house.

      2. The city pays the FMV of the laon, ~307k, to the Trust and accepts a short agreement to rewrite the loan to ~170k. The option is out if you believe the MRP site that states no taxes will be used in these exchanges. In this situation it is the city who eats the difference. It is worth noting the Cornell guy suggests exactly this in his own example (he wrote a paper on this which I link to above), implying even he doesn’t believe the value of the house will really be a winning point in court.

      3. Some other charitable or govt entity kicks in the difference.

      4. The Trust accepts a value less than FMV (which could violate fiduciary responsibilities and thus be illegal) but in your example the numbers are too far out for that to be likely. My example gets closer to that possibility.

      I’ll reiterate, the issue is not the value of the house, but the value of the loan asset being taken by the city, which as far as I know never (in the “open market”) takes into consideration the value of the real property asset backing it. In fact, among people observing the housing crisis building since ~2003 (e.g. is a great example) that has long been one of the primary criticisms: that the loan assets are based on historical payoff patterns. Those models are still in place.

      • Oops: I didn’t update my spreadsheet with the new discount rate, 5% in the example above. The FMV of the loan at that point is 338k, not 307.

      • Man lots of mistakes, my starting example mortgage is also 330 not 320. All the points still stand.

      • @Blueprint Oh I get your point, I don’t think you get mine. I think your view is how this idea got rolling, I think my explanation is how it will be implemented.

        Let me explain they will in the end grab the PROPERTY not the loan, the investor holds the loan, in grabbing the property the homeowner will become absolved of the current debt the city will become responsible for it.

        Now under eminent domain they will pay the value of the property not the loan. In my example 170K and tell the loan holder to suck wind. Is that legal? I don’t think so. Is it possible that they will ram it though and judicial thugs will stand behind it, I do think so. Hell they just called Obamacare constitutional didn’t they.

        Some of these cities/counties/states may even be smart enough to pass a second “emergency powers of eminent domain” or some such law before going forward.

        They may in the end attempt to pacify the investors by doing something like a 50% split on the difference paid by tax payer money in some sort of bail out, given assclown O has his finger prints on this it may even end up with another Federal bailout supporting it. Hell they may make it a special Assclown O project in the end.

        So now numbers would work like this.

        House purchased at 350K
        Loan for the house was say 330K
        Mortgage is 5 years old and home owner still owes about 320k
        Current market value of the home (not the mortgage) is about 170K

        They grab the house and the private investors kick in 170K, the Fed kicks in 320-170/2= 75K so the investor gets 170+75= 245K and obviously some special “tax write off” that ends up making the deal profitable and “frees up money for new investments”. The home owner gets a new mortgage for 170 but they keep the big tax bill on the house as a “special provision for the assistance”.

        See you guys are working this from the angle it started, I am looking at how the assclowns will sell it in its final package. You don’t have to pay the existing investors out of pocket, there are huge tax issues with investments of this size, you can pay some up front and back door even more then the loss long term and they will shut up and happily take it.

        When I say we are playing checkers while they play chess this is what I mean.

        • Ok in this example then it diverges so much from the original conversation that is not anywhere near the same thing. I mean the discussion has totally changed to a new thing.

          Bottom line we agree the story you read is NOT going to happen. (e.g city pays nothing, investors get FMV, homeowners owe less and magical value-farting unicorns cover the difference).

          I find your example highly unlikely. First the cities aren’t going to pay shit (they can’t afford it, remember?). Second neither the Fed nor the Fed Gov is going to start writing checks in such an obvious way (especially with an upcoming election). They prefer more obscure monetization techniques.

          The more likely scenario is: this is a bit of posturing/pandering on the part of city officials to get reelected. Like HAMP and all that crap…nothing really comes of it. The city here isn’t really going to do a fucking thing. And the Cornell guy is just a retard (seriously, read the paper).

          The long term strategy is debt monetization and ever-lower interest rates (they can go all the way to zero and maybe neg rates for things like mortgages) until the thing blows up. Eventually”they” start over with a new monetary unit.

        • @Blueprint, no I am not so sure.

          First this won’t happen before the election.

          Second of course the Fed will write checks if it comes down to it! Hell this is so easy to sell to the sheep, they simply say, “Bush gave the bankers a bail out and the irresponsible home owners a bail out, this is simply assistance for hard working Americans who have stayed the course and behaved responsibility, this is what should have been done the first time around”.

          Third Obama would do this before the election if he could, ABSOLUTELY, I would bet properly sold this would get better than 70% popular support. Likely closer to 80%.

          Fourth they may very well not pay the difference at all, with an “emergency powers law” supporting ED nothing really in the Constitution would prevent it. If a state does this all that is required is that their constitution and the Fed constitution doesn’t prevent it. Neither do.

          Five the fed involvement is solved a “grant to the states” and the tax code is easy to shove a form of compensation into for these people. No member of congress would have the balls to oppose this. If you think most people would object to this you are overestimating the knowledge of your fellow Americans.

          Six you are ruling out other options like “tax fee and interest free loans” in return for the losses incurred, etc.

          I know you believe this is unlikely I actually think it is highly likely, time will tell who is right. Keep in mind all one needs to do to make this work is sell it to the sheep. I don’t like it, I don’t want it, I think it is a terrible abuse of power but let me tell you if I wanted to I could easily sell this idea. And if I can sell it and I don’t want it, well.

        • Let me explain they will in the end grab the PROPERTY not the loan, the investor holds the loan, in grabbing the property the homeowner will become absolved of the current debt the city will become responsible for it.

          Neither the city nor the investor group have any interest in the property.

          The investor group is basically proposing to use the city’s power of eminent domain to take the property at a value close to the current fair market value. When the city does this, the mortgage holder gets paid what the city determines is fair market value (without any regard to the current value of the loan on the property) and the city assumes title to the land for the price of the fair market value which will be funded by the investors. The city will then sell the property back to the occupant for (from their example) a 20% markup on a loan funded by Fannie Mae or Freddie Mac – all profit paid to the city and investor group without their taking any risk whatsoever.

        • TykeClone,

          That isn’t my point they grab the property as that is what ED does, they use it to acquire the new investment (mortgage). Again you guys are playing checkers yet again.

      • Great discussion.

        My final thought is I doubt they will do anything that helps the regular guy. Even city officials are DemoPublicans and will tow the party line. They are looking for state or fed positions…

        Best thing for this crowd is to ignore this crap, it’s noise. Focus on self-improvement; things you can control. Be productive. Build relationships. Trade with your neighbor, neghborhood, town, etc.

        Thanks for the show Jack.

        • @bluprint we agree to disagree I think you are hugely underestimating this and what it will mean. The precedent it sets is to these people “worth helping some people” short term. What it actually does is set the stage for major government grabs when the crash comes. This is far bigger and far more important then I think most people realize.

    • And Jack I would like to clarify I have no emotional tie in this. I don’t get upset about govt getting involved like this. Not b/c I think it’s ok (I’m the most libertarian person involved here, guaranteed) but because I’m pragmatic. I totally agree with your position on ED; not good but here it is so deal with it. I feel the same about any govt activity: there ain’t shit I can do about that. Which is why I focus on things I can control like gardening/self-reliance, expanding my professional skill set, financial strength, etc.

      And I couldn’t give two shits whether Goldman Sachs makes another dollar, so I surely have no interest in protecting people like that.

      I’m purely looking at the facts. All the facts as presented cannot be true. Something would have to change for any deals like this to get made.

      • You said,

        “Something would have to change for any deals like this to get made.”

        As my son said when he was 7 all the time, pazackly and they can change the rules as they see fit, that is my point, see my response above for one way it could be sold and pulled off.

  8. The benefit of New Hampshire and the Free State Project is the already established community. We have so little control over what is coming soon that community is more and more important. I spend more and more of my time helping new movers to this area. The numbers are growing rapidly and I know that many, if not most, will come to my personal aid when the time comes.

  9. Question: If one moved to one of these zones in Honduras, or I guess any other country for that matter, and still had a telecommute job with a US company, I imagine the IRS would still demand income taxes, right? Would they still take SS & Medicare taxes too?

    • @metaforge, this all relates to citizenship. If you move anywhere on the earth and are an American citizen Ira Ramone Sancia (the worlds biggest gangster IRS) wants his tribute from “his people” which yes includes income taxes and SSI. Please note we are the only nation on the planet where this is the case. If you stay longer than six months and pay taxes to your host nation you would then stop paying Ira Ramone Sancia. You would still though pay the SSI.

      If however you were a citizen of Canada, England, Spain, Iraq or any nation on the planet you would not pay shit to your nation of citizenship. If you stay in most nations less than six months you pay no taxes either way after six you pay to your host nation based on their rates. Only the US out of every other nation on the planet claims ownership of all citizen income for life. YES WE ARE THE ONLY ONE. You would also still pay capital gains to Ira Ramone and any other taxes other than strait income taxes which again you only stop paying after six months and only IF you are paying income taxes to your host nation..

      Citizens of many other nations will live say 90 days at a time in three or four nations a year and pay ZERO income tax, again the US is the ONLY NATION ON PLANET EARTH where you can’t do this.

      To make the escape to Hondo the Honduran government would have to offer citizenship along with this city approach. After you had it you would then have to go to a US embasy and fill out a form (this form used to be free now it is 250 dollars if that tells you anything). This form would officially renounce your US citizenship and make you exclusively a Honduran citizen. You would then be subject only to Honduran taxes and if you lived abroad six months a year or more you could pay zero, again only US citizens can’t do this.

      By the way the maximum corporate tax rate in Honduras is 25% vs 35% in the US. Their version of SSI is 7.2 vs 12% in the US, their Capital Gains tax is 10% vs 15% in the US. They have a property tax of 1/2% and there is NO TAX on personal income. They also have a decent though not as good a health care system as we have but it is decent and it is free to all citizens. Now we know there is no such thing as free but these lower taxes pay for it. Also on the .5% again 1/2% property tax please consider a 500K property in the US would cost about 100K in Honduras so effectively for comparable property we are talking .1%.

      Then these pricks tell us we are the freest nation and pay low taxes.

      • Awesome answer, Jack, thanks! It’s unfortunately as I feared…

        I wonder if at some point the ‘liberty zone’ or ‘Hondo’ as you call it they are setting up would be able to grant its own citizenship, and effectively be its own sovereign, so you could be a citizen of that rather than Honduras proper?

        • metaforge, just to be clear when I say Hondo I mean the country, it is GI speak I guess still in my lingo.

          As for the zones offering citizenship not likely for that to happen.

          1. Honduras would have to grant the territory as sovereign and give up all claim to it. Not very likely.

          2. The international community specifically the UN Security council would have to recognize the new nation and OF COURSE the US has VETO power there of.

          The better option would be to have Honduras make the zones a territory subject to protection by the Honduran nation but giving some sorts of exemptions for citizens in the territory with the return being non participation in some benefits. One could be their SSI, no SSI payable to Hondo but you don’t get SSI benefits. As a nation they can do this if they choose. They could also grant citizenship as fast or slow as they choose with specific requirements of their choosing.

          So they could say a one time tax of 10,000 per family and proof of income (so as not to be a burden) of a minimum of say 2K a month and you can be a citizen on day one, done, no one can do shit about it. They could possibly like apply no VAT taxes inside the zone though imports from Hondo proper to the zones might pay it only on import, etc.

          I don’t know what taxes pay for their version of Universal Health Care but residents of the zones could possibly be exempted from those too if they would then not get the “free service”, etc.

        • Thanks for the clarification & thoughts, I did misunderstand Hondo – I thought you were naming the zone. Maybe residents of the zone could eventually be called ‘Hondozonetarians’ 😉 Well this certainly is a story to follow and see how it plays out – hopefully better than the other attempts at doing this sort of thing that the article mentions.