Wednesday, March 17, 2010

The End of Pretend?

Just enough time for a quick thought.

The End of Pretend?
I will not bore you with how fractional reserve banking works. Let's leave it at the fact that none of your money is really at your bank. Banks are required to keep minimum reserves to meet things like withdrawals and banking losses. The losses part is a drag because, well, of all the money the banks have lost in real estate loans. This kills earnings and limits lending.

Of course in the new age of taxpayer backed speculation, Ben Bernanke wants to up the ante and allow the banks to lend out not $8-$10 dollars for your every one at the bank, why not lend out infinity? Why bother carrying cash to cover losses when losses are the sole responsibility of the US taxpayer? Why indeed?

I thought this was a joke but it is a real story (Hat tip The Economic Collapse:
Money Out Of Thin Air: Now Federal Reserve Chairman Ben Bernanke Wants To Eliminate Reserve Requirements Completely?
Key footnote line:
That simply does not make any sense. But it is right there in black and white on the Federal Reserve's own website....

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

I guess this is the logical extension of our situation. Maybe the pretend is over, just do whatever you want.

I think I want more gold and silver.

Have a good night.


watchtower said...

"...none of your money is really at your bank."


getyourselfconnected said...

"I DRINK your milkshake with fractional reserve banking!!!"

No worries Watchtower, I am sure all of yours and mine is there, maybe not ALL of Marks's Halo3 money though.

GawainsGhost said...

OK, here are a couple of legal terms pertaining to real estate.

Fair market value is an estimate of what a house will sell for, prepared by a realtor or broker, based on recent comparable sales. Market value is the actual sales price. These two are not synonymous but can be equal.

Assessed value is an estimate of what a house is worth, prepared by a county appraiser. It is the amount on which the taxes are levied. But here's the thing. The county appraiser never inspects the house! He never even goes inside. He just drives by and basically makes up a number.

Now, suppose a house is priced on the market at $100,000. A buyer comes in and agrees to offer that price, and the seller agrees to the contract. The closing costs on this transaction are $8000.

However, the buyer doesn't have $8000 for closing costs. So the lender encourages him to take out a loan for $108,000 and have the seller pay the closing costs. This is what is known as rolling over closing costs.

Now an "independent" appraiser is hired by the lender, even though he is actually paid by the buyer out of the closing costs, and is asked to provide an appraisal of the house. The amount of the loan is $108,000, but the actual market value of the house is $100,000, which is what similar homes in the subdivion have been selling for recently. So what is the appraiser to do?

If he does not value the house at $108,000, the loan cannot be justified. Thus, he goes outside of the subdivision to find comparable prices in order to justify the loan amount. The deal goes through.

This is fraudulent and deceptive, and it's all done to "help" the buyer. But now he owes $108,000 on a $100,000 house. It will take years for him to pay down the principal just so he can break even if he needs to sell the house, because no one is going to pay $108,000 for a $100,000 house. Why would they when another house in the same subdivision can be bought for $100,000?

You see how that works? Fraudulent lending and fraudulent appraisal. Then the county appraiser drives by and assesses the value of the house at $110,000, in effect taxing the buyer at above market value and even the loan amount.

Principal, interest, taxes, the now home owner can't afford the payments and defaults on the loan shortly after purchase. The house is foreclosed on, repossessed and put of the market for sale months later. But by now property values have declined in the subdivision and the house can only sell for $90,000. So the bank who made the original loan is looking at an $18,000 loss. But the bank sold the loan on the secondary market, and now the investors and the taxpayers are forced to take the loss.

Multiply that by several million times over the last decade and you see the severity of the problem.

Dave in Denver said...

Hey GYC, thanks for posting that link of my blog. I went skiing today and would have missed it otherwise.

Bernanke is a psychopath - plain and simple. His motive for no reserve requirement would be to create a systemic printing press without affecting M2. Unreal.

getyourselfconnected said...

ugly details. I did see that going on up here and the amounts were MUCH bigger. Cannot even imagine Southern California numbers.

GawainsGhost said...

Well, I was trying to keep the math simple, but you're right the actual numbers are astronomical.

But the salient point is that if fraudulent lending and appraisals, that is false valuations of credit and price, is what caused this financial crisis, why is the government and the Fed proposing to continue the same flawed economics?

Answer: Because they're either incompetent or corrupt, or both.

GawainsGhost said...

Here's another one, and you're going to love this, GYC.

I got an offer on this house. It was countered by the seller, and after some negotiation a sales price was agreed upon. At that point, the seller prepared an addendum. I informed the selling agent that the final contract must match the addendum, and that we would need everything signed and initialed, along with the earnest money in the form of a cashier's check or money order, delivered to our office so we could overnight it to the title company.

Yesterday, while I was eating lunch, I got a phone call from this idiot. "Can we roll over the closing costs?" I told him, no. That was not part of the original or the final contract, it's not in the addendum. That was not the deal the seller agreed to. The only way to make that work would be to cancel the contract, submit another offer, have the seller agree to it, and prepare another addendum. Which could take over a week, and there's no guarantee that the seller would agree to it.

This guy. He presents an offer, it's negotiated and a final price is agreed upon. An addendum is prepared. And on the day when his buyer is supposed to sign the documents and provide the earnest money, he wants to change the terms? It's ridiculous.

Well, turns out, it was the lender's idea! Roll over the closing costs, and the buyer will have extra money to spend on other things. I asked this guy, doesn't your buyer understand that if he does that, he'll be buying a house with negative equity and paying 6% interest on the loan for the closing costs, not to mention the house, for 30 years? He couldn't answer that question.

Nothing has changed. The same fraudulent and deceptive practices that created the housing bubble are still in place. The lender wants to maximize the loan, because it wants the extra interest. Doesn't matter that it screws the buyer royally.

How is this all going to end? I suspect badly.

sedintary state said...

>Maybe the pretend is over, just do whatever you want.

Regarding Monday's post, poor Key Lay is turning in his grave.

And Bernie Ebbers is probably chewing on his cell bars like a rabid hyena.

What those fine fellows would have given to live in today's world.

crisis garden said...

>Doesn't matter that it screws the buyer royally.

Apparently the buyer wants to be screwed GG, as he can't get his pee brain to think longer term than that fist full of fresh spending cash.

Oh well, more pigs to the slaughter.

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