World's STUPIDEST "Smart Person" advice - Law Prof says walk from your mortgage

[scottp999]

By the way - if you understand Fractional Reserve Lending, which is the model under which our banks operate, then you should be aware that when you stiff a bank, the impact on the economy is magnified by a factor of 9.

See - banks lend under rules that say for every $1.00 they have in assets, they can lend out $9.00. Yes they literally create money out of thin air - that's a different topic, however, but it's a fact of economics.

If you have a $400,000 mortgage, and your house is worth $300,000, and you walk away, your mortgage, which used to be an asset which allowed them to lend out $3,600,000 now becomes a liability - an actual house, with expenses, that CAN'T be used as an asset for lending. If they turn around and sell the house for $200,000, now not ONLY have property values been pushed down in the neighborhood for another $100k, but the bank now only gets back half of the lending power it used to have.

It doesn't take very many people walking away from a mortgage before the bank has lost so much lending power that it's over the legal limit of what it can lend.

THAT creates a credit freeze - and that's what happened in late 08/early 09.

And as I said earlier, a credit freeze affects jobs, it affects businesses ability to purchase inventory, it freezes the economy, because sadly we ARE a credit based economy, and until we fix THAT, we need the banks to be operating, and they can't do that when people just go stiffing them cause they're underwater and pissy about it.

I completley agree with you! I don't like the system we have at the Central and Commercial banking level, but if say 20% of people with mortgages walked in short order, the entire economic system would likely collapse. This is what the extra Federal spending has been doing, keeping that reverse factor of 9 from collapsing the system. It is easlily observable on the Federal Reserve Z1 report (Flow of Funds Accounts of the United States). Federal spending has been trying to create debt fast, to make up for debt collapsing on the consumer side. Without that effort, our lives as we have known them would be blown out like a candle.

According to the Chairman of the US House of Representatives, Capital Markets sub-committee, we were about 2 hours from the entire world economic system collapsing, over the next 48 hours, in September 2008. I don't think many people know that:

...If they had not done that, their estimation was that by 2 o’clock that afternoon $5,500,000,000,000 (5.5 "trillion dollars) would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

Now we talked at that time about what would happen, if that happened. It would have been the end of our economic system and our political system as we know it.”
-Rep.Paul Kanjorski (D-PA), Chairman of the sub-committee on Capital Markets, Sr. member of the Financial Services Committee, Feb 6th, 2009, from an interview on CSPAN

If you want to see him say it on video: [ame="http://www.youtube.com/watch?v=Sxz6gYIiFHc"]YouTube- Rep Paul Kanjorski: 11 Sep 2008 Electronic Run On the Banks[/ame]

[sabrelvssammy]

According to the Chairman of the US House of Representatives, Capital Markets sub-committee, we were about 2 hours from the entire world economic system collapsing, over the next 48 hours, in September 2008. I don't think many people know that:[/B]

** or truly believes it once they hear it.....**


...If they had not done that, their estimation was that by 2 o’clock that afternoon $5,500,000,000,000 (5.5 "trillion dollars) would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

Now we talked at that time about what would happen, if that happened. It would have been the end of our economic system and our political system as we know it.”

and when you think about how close we 'really' came to that scenario......its truly very frightening.....as it would have been something that profoundly affected every man, woman & child no matter your economic class......

and while we are on the subject there are some really good 'reads' out there about the true ramifications were we to experience such a crash...while some are written by the 'radical' people that are grabbing their families and heading for the mountains only taking their firearms and the abilities they have learned on how to survive off the land...others by 'experts' telling those that choose to stay behind what to expect as their cities and 'own worlds' come crashing down around them within a matter of days...possibly hours.... the prospects were quite enlightening and very frightening at the same time.... i remember reading some of these to dh when this crisis all began and he laughed the entire time..calling the writers nuts...and the people wasting their time (including me) reading this 'crap' nuts.... alot has changed in a year... i don't think he would actually use the term 'nuts' anymore....

[scottp999]

and when you think about how close we 'really' came to that scenario......its truly very frightening.....as it would have been something that profoundly affected every man, woman & child no matter your economic class......

Sorry for going off topic, this is the last I will say about it, other than to hope people really research the monetary system we live in, because it is the next step in understanding the rules of the system after you are knowledgable about personal finance matters.

I agree with you! What is very interesting is that the financial system is built on a model that is flawed. Won't go into details, but it isn't really a design made to last.

All fiat currency systems in human history have imploded (hundreds of them). They have had to be restarted or rebalanced, which is a very painful process for the people that need the currency to avoid going back to the barter system. In the past when they collapsed, it was either more localized, and/or not the "world reserve" currency (except for maybe the roman empire deflation) that was the problem.

In recent times, this allowed the IMF (member countries) and World Bank to help ease the pain. Recently, this has happened in Russia, Argentina, Mexico, etc. Worse case in Zimbabwe, where people actually dig for grains of gold to be able to buy bread because merchants won't accept the currency.

The problem we have right now, is that this is both the first time the "world reserve currency" has been in danger, and the first time in human history, that the entire world is on a fractional reserve, fiat currency system.

The last link (except for maybe the Swiss) to a tangible asset based monetary sytem, was stopped by Nixon and his administration on August 15, 1971 (ending the Bretton Woods Agreement). After that time, they tried what was called the Smithsonian Agreement in '73 to peg the major currencies in the world to each other. That agreement collapsed very quickly, and we went to the floating exchange rate system we have today.

When people look at a dollar bill in their wallet, they assume that's the same thing we have had since Alexander Hamilton came up with the ideas around our first official system in the late 1700's. In truth, it has been re-organized several times, and the Federal Reserve Notes in your wallet, with their current "backing", have been an experiment that has only lasted about 37 years, and almost collapsed near the end of it's 35th year.

Just on Friday (Dec 5th 2009), the Treasury Secretary being interviewed by Al Hunt on Bloomberg - Political Capital, when asked if Goldman Sachs needed financial assitance 14 months ago:

"My view is this, the entire US financial System, and all the major firms in the county, and even small banks across the counrty, were at that moment at the middle of a classic run, a classic bank run. I think the system was at risk, and the the big institutions...none of them would have survived a situation in which we had let that fire try to burn itself out."

Link to story and video here: http://www.bloomberg.com/apps/news?p...BZDUtZo&pos=11

Now how many people realized the entire US banking system was having a "classic", although electronic bank run at the time it happened in Sept 2008?

[littleplum]

Well apparently AZ is a "non-recourse" state - which means in many cases, walking away from a first mortgage means NO penalty to the borrower (beyond the harm to the credit report of course), so I *can* see how an attorney might recommend this.

Honestly, however, if I were a lender in AZ, I'd stop being one until the laws were changed - if people start doing this habitually, AZ homeowners are screwed.

AZ is already really, really bad. At least Phoenix is. The run up in the last decade was just way too fast.

10 years ago, I bought a house for $85,000. 5 years ago, I sold it for $140,000. I drove by it last week and saw that it was for sale again, so being curious, I looked it up. It's listed for $75,000 and that is after what appears to be about $20-30,000 in upgrades: all new flooring throughout, new cabinets, counter tops, and appliances in the kitchen, all new fixtures in both bathrooms, brand new landscaping front and back.

Apparently the man who bought it from me died, and his heirs let it go into foreclosure.

[littleplum]

By the way - if you understand Fractional Reserve Lending, which is the model under which our banks operate, then you should be aware that when you stiff a bank, the impact on the economy is magnified by a factor of 9.

See - banks lend under rules that say for every $1.00 they have in assets, they can lend out $9.00. Yes they literally create money out of thin air - that's a different topic, however, but it's a fact of economics.

If you have a $400,000 mortgage, and your house is worth $300,000, and you walk away, your mortgage, which used to be an asset which allowed them to lend out $3,600,000 now becomes a liability - an actual house, with expenses, that CAN'T be used as an asset for lending. If they turn around and sell the house for $200,000, now not ONLY have property values been pushed down in the neighborhood for another $100k, but the bank now only gets back half of the lending power it used to have.

I have always thought that it was insane that outstanding loans or receivables are considered assets by a business. I know why it's done that way, thanks to my years in accounting classes. It just goes against all common sense; you know - don't count your chickens.

[littleplum]

Well, my personal integrity is very much intact, because I have no mortgage to walk away from. No worries there.

Whatever, I still think that pressuring the lower group in the power chain to be honest and honor their commitments while the big boys do whatever they damn well please is a means to keep people in their "place." That assertion makes people defensive and angry. IMO, this is because people want to believe certain things about themselves and a certain view of how the world works. That's why big businesses get excuses and the little guy gets recriminations.

FTR, I'm not saying that people should walk away from their mortgages. But if businesses are expected to do what's best for their bottom line, people's lives and futures be damned, then it's illogical for families to be expected to act differently. Frankly, it's a double standard.

Can someone in this debate please show me where mortgage banks failed to meet their contractual obligations to the ones who borrowed the money?

From where I am sitting, it looks like a bunch of greedy people applied for loans on homes they could barely afford, the banks lent the money, and now they are being blamed for lending money to people who VOLUNTARILY signed up for the loans.

How are the lenders the ones at fault, again?