10A045 Scrambled Notes by Jim Davies, 10/16/2010

According to PBS' News Hour on Thursday, NY Judge Arthur Schack has ruled that foreclosures won't be approved for action unless the plaintiff holds a valid note. Since virtually all mortgage notes have been mixed with others and sold to large investors in bundles and then subdivided, mixed with yet others and repackaged and sold again, that's hardly ever possible. If his ruling prevails, it means nobody's mortgage can be enforced. That realization may well underlie this week's decision by the Bank of America and other large lenders voluntarily to "suspend" foreclosures. The implications seriously strain the brain.

For more gory details, see Gonzalo Lira's analysis on LewRockwell.com (and shield your eyes from some naughty words, for Mr Lira does get quite excited) but if I understand them, they raise the question: if a debt is unenforcible, why pay it? - not just those under financial strain, but anybody, ever?

I think there is an ethical question here, before we proceed. John signs a promise to make some payments to Friendly Bankers, Inc. Just because FBI loses its ability to enforce that promise, should John walk away from it? - in your own spot, you decide. But let's suppose that most borrowers say, Yes. Then what?

There are about 55 million mortgage borrowers, owing about $15 trillion - to somebody, though Schack's ruling means we don't quite know to whom. If they all simply stopped paying because the debts just became toothless, all those 55 million would be a lot better off, immediately; by perhaps a couple of thousand dollars a month. All continue living in their homes, but suddenly have much more disposable money. That sounds pretty good!

Then there's the other side of the coin: the lenders. Are they big bad bankers? - not quite. They are companies with shareholders and obligations - to those who are the same people, more or less, as just got that windfall. So if the companies suddenly lose vast portions of their assets, they will be in deep trouble: $15T deep. And so will we.

So is this a zero-sum game; if this dramatic change took place, would we just be moving money from our left pockets to our right ones? - no, not quite. Since a great deal of the money held by the big lenders has the form of pension funds, earmarked to pay our pensions when we retire, we'd be moving money from our future to our present. A big bird in hand, but none later in the bush. Is that wise?

Normally, it may not be smart. However, we live not in normal circumstances, but in ones distorted by government; when those pensions are paid, they will be worth a lot less than we suppose. Government will have certainly reduced further the value of its dollars (by 98.5% and counting, since 1913.) So if, for example, people were to take that $2,000/mo windfall and use much of it to invest in gold and silver, some highly secure stocks and even some very low-priced real estate, we'd be taking back our futures from government and its funny-money. And that, I reckon, would be very smart indeed, with all kinds of positive side-effects.

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