The Foreclosure Crisis and What It Means to You—Part I

Ok Folks. Sorry, but it’s that time again. Yes, I’m going to address another component of Financial Preparedness today. For those who feel that the topic of Financial Preparedness is about a dry as a bag of 100 year old beans, I apologize. I truly do try to restrain myself so that you aren’t too bored. But in the case of today’s article, there was simply too much that was too obvious (and somewhat alarming) to me, that I couldn’t hold back from trying to educate on this one. (Ok. Yes. I used the word “alarming.” But remember, I don’t believe in “emergency preparedness.” When I have feelings of alarm or great concern, it’s usually on behalf of those I care about who I know are vulnerable to and ignorant of what’s going on around them. I really, really hope that does not describe any of the readers of this blog, but unfortunately, my Inbox is full of e-mails from some folks which tell me a different story.  So today, this is me trying to educate and alter that alarming reality for some, in hopes that I might sleep better tonight. (Yeah, I really am that selfish. *grin*)

Foreclosure in the News

Recently you’ve seen a great deal of news about some large mortgage companies, banks, and servicers who have had to halt their entangled legal process of foreclosing and completely reevaluate their process. Perhaps you’ve been shocked at the large number of default-worthy properties in our nation—presently holding at 2 million that are actually in foreclosure and another 2.37 million who are seriously delinquent, according to LPS Applied Analytics. These are homes, folks; residential properties. Mark my words, we haven’t even begun to see the festering economic wound of commercial property foreclosures that are close behind.  Based on my tie-in to the commercial property industry, I estimate there to be over $40 billion of commercial properties that are ripe for foreclosure too.  So, what does all of this mean to you and why in the world should you care?  Because this crisis is a key component of the perfect storm I’ve been warning about—a financial collapse that will make The Great Depression look like a Sunday Potluck. What we are seeing right now is the consequential mayhem which accompanies a mythical money system, and it’s about to get very ugly.

When you apply for a loan on your home and you go into the title company to sign the mounds and mounds of paperwork, one of the things you sign is a Promissory Note. This Promissory Note is a financial security note. So what this means is that the bank is putting full faith in you by accepting this Promissory Note from you.  It’s no different than you accepting a $20 bill as a viable form of currency.  What this means is that the mortgage company does not pay for your home and simply let you pay them back over time. Nope, YOU pay for your home at the closing table in the form of the Promissory Note, made payable to the bank. Let me say this one more time. The bank has not paid for your home. You did by signing a promissory note which is a valid financial security in our world economy.

I know. I know. I can totally see many of you in my mind’s eye shaking your heads at your computer right now thinking that I’ve gone off the deep end. I assure you I have not. Let me show you what happens to this Promissory Note.

A Promissory Note is considered a financial instrument in the world of international finance. Investing in a person’s legal residence made up of sticks and stones is rather inconvenient to movers and shakers in the financial world.  The same goes with gems, oil, wheat, etc.  An investor doesn’t want to be carrying around these kinds of items or pay to have them watched and protected; rather they invest in the Promissory Notes which represents them. (This mindset is exactly how we ended up relying on paper currency, rather than gold or silver coins.) This paper is commonly referred to in the industry as a “financial instrument” and in order for a person to invest in it the instrument must be the original form. A great deal of money is spent to validate the veracity of a financial instrument, ensuring that it is indeed the original document—otherwise, the holder of a COPY of a financial instrument can flash it all over the international banking industry and have the same collateral invested in time and time again. (While this is tolerated in our own system of currency, international traders are much more demanding when it comes to the veracity of their collateral.) Rather than investing in a home consisting of sticks, stones, and termites, investors instead deal with paper; the paper otherwise known as a “financial instrument.”  These financial instruments are the collateral for investors, much like you would think of Treasury Bonds.  So, when an investor invests in a particular financial instrument, such as a Promissory Note for your home, he/she receives the ORIGINAL Promissory Note in exchange for their financial investment. This is an important fact to remember in just a moment.

Have you ever wondered how a bank/mortgage company makes money on mortgages? Some of you might think that it’s about the interest they earn.  Now think about that for just a moment.  Suppose you purchase a $250,000 home and get a loan for that amount (yeah, I know, not realistic anymore, but play along with me anyway).  So the mortgage company forks over some digits on a computer screen of $250,000 to whomever is the lien holder. And let’s say your payment is $1,280 a month. Now really; think about this. They fork over $250,000 and they are supposed to be giddy about your measly $1,280 a month payment? Of course not. It’s too little of a reward for so much over such a long period of time  (I assure you that the only reason why 30 and now even 40 year mortgages exist is because it somehow financially benefits the mortgage company).You’re payment is simply gravy to them. The real prize is initiated as soon as your paperwork is sent back to your mortgage company. Here’s how.

Let’s start with the mortgage company/bank.  When they issue money, otherwise known as a debt on your home, they get to use that home on two sides of their accounting. They don’t have to wait and see whether or not you pay them off or on time each month.  Their monetary gain begins almost immediately. First of all, the home is shown as a liability; a debt for which they may or may not be paid. It all depends on the integrity of the borrower, right?  But on the other side of accounting, they get to show the Promissory Note (not the house) as an asset. Gotta love this kind of creating accounting practice, right? Of course it’s all endorsed, signed, sealed, and delivered by the Federal Reserve. This is because a Promissory Note is indeed the same as any other hard asset to them such as gold, silver, or oil.  What they then do with that asset to make themselves “financially whole” as per the mortgage agreement is multi-faceted.

First of all, remember that banks are allowed to lend out a minimum of EIGHT TIMES the amount of assets they have. So, sure, they conveyed some electronic digits to a lien holder on behalf of your home. And sure, they will make some heavy interest over the next decade from you making your house payment. But the real money is in the asset that is on their books.  Your $250,000 Promissory Note is worth $2,000,000 worth of more loans and the interest to them. However, banks aren’t content to “just” earn money that way. They leverage your Promissory Note by allowing investors to buy a piece of it in exchange for some gain or, even better, they lodge the original Promissory Note with one of ten international trading platforms.

A trading platform is very similar to what you see on the floor of the U.S. Stock Exchange except with much larger numbers and much less regulation. In a matter of hours, $1 can be turned into $5, and remember that $5 now represents an even larger asset to the mortgage company by which they can lend out at a ratio of eight to one.  However, there’s a catch. In order for them to participate in this kind of  leveraging, they must lodge the ORIGINAL Promissory Note with the trading platform—never a copy—no matter how “certified or notarized or vouched for” that copy may be. This is called securitizing. The mortgage company securitizes your Promissory Note in exchange for the profits that financial instrument will bring in the worldwide financial market. When the Promissory Note securitization converts into money, that’s what’s called monetization. So, allow me to say this once again. The mortgage company didn’t technically pay for your home; you did, as is clearly evidenced by the financial value of the Promissory Note you signed.  So, is the mortgage company “made whole” as required in the contractual mortgage agreement? You betcha. Long before your 30 years has expired. Quite a racket, eh? Like I said, one has to be a special kind of stupid in order to fail at that kind of a gig.

So for today, I’m going to leave you with this foundational bit of information. Tomorrow I’ll clear up why the House of Cards built by the Federal Reserve, our government and the mortgage companies is beginning to crumble and what exactly it means to you.

View the second part of this article by clicking here:

The Foreclosure Crisis and What it Means to You–Part II