Robert Shiller of Case-Shiller Says His Firm's Forecasts Are Turning Increasingly Pessimistic

The Robert Shiller interview yesterday with the Wall Street Journal gives us some insight to the bad housing numbers just released this week:

• Shiller admits this month's huge fall in prices caught Economists off guard. He says both Bloomberg and his firm poll Housing specialists and no one saw the pessimistic numbers just released for November coming.
• Shiller says that if this keeps up through December (numbers to be released in January 2011), the overall housing market will have lost another 10% or more for the year 2010.
• On one hand, Shiller says the latest downtrend in housing prices has only been in effect for the past few months, that a clear downtrend is not clearly seen.
• Still, Shiller admitted, "But if home prices continue on this pace down, I think the Economy has serious reasons to worry.
• "We just had six of twenty big cities we follow report new lows below the lows of 2009," points out Shiller. He believes the reason for that last plateau low in Spring 2009 is that in early February 2009 the US Government instituted the short-lived Homebuyer's Tax Credit. As he said, "That was a major turning point for the market. It suddenly turned up. And we saw price increases for much of 2009 . . . "
• Shiller speculates that there will more than six new lower lows out of the 20 cities he and Case follow in the coming months.
• He also expresses he though the 2009 Homebuyer Tax Credit was a good government stimulus but ponders, "How willing is Congress going to be to do it again?"
• Despite what is happening at this moment in housing, Shiller tells us some forecasters from his firm Macro Markets are predicting a rise in housing prices by 7% by 2014 (or three years from now). And yet, he admits, more of his forecasters are becoming increasingly pessimistic.

Business/Economic/Housing News for 29 Dec 10

Art Laffer: Get The Government Out Of Housing

Art Laffer, of the "Laffer Curve" and the Reagan White House says the Federal Government needs to get out of the business of propping up the Housing Market. He said, "Everyone knows the Bush and Obama Economic Policies have failed." More in this interview:

Paul Jay's Interview Of Professor Micheal Hudson: "The World Is Tired Of Paying The Bill For The US Military"

Paul Jay interviewed Professor Michael Hudson on Real News recently. Hudson is an ex-Wall Street Economist who is now a Research Professor at the University of Missouri, Kansas City. Hudson is the author of "Super Imperialism: The Origins and Fundamentals of U.S. World Dominance" and "Trade, Development And Foreign Debt".

Hudson starts the interview by saying he was Chase Manhattan's Balance Of Payments Director during the 1960s. During that time and the 70s he was aware the entire balance of payments defecit for the US Government was due to the US Military. Hudson continues saying that during that same time, the entire balance of payments for private business was in balance. Furthermore, the US Government actually ran a surplus with its foreign aid during this period.

Back then, it was the cost of the Vietnam War and the cost of establishing and maintaining bases in Southeast Asia which drove the defecit. In comparison, today the US has over 850 military bases around the world. (If you know anything about Gulf War II, over $12 Billion in US $100 bills (pallet loads of them) "disappeared" with no accounting.) As Hudson points out, we are still giving away free money in Afghanistan with little accounting and little to show for it. Hudson says because of such types of waste, today, "There is a huge deficit in military spending."

David Walker - Federal, State & Local Government Has Grown Too Big, Promised Too Much, And Is Based On The Past Not The Future

Watch the Honorable David M. Walker, Founder and Chief Executive Officer of the Comeback America Initiative (CAI) and Former Comptroller General of the United States (1998-2008), in an excerpt from his dynamic presentation at The American College's 2010 Knowledge Summit. Mr. Walker discusses the national debt and solutions to improve the nation's economy.

Walker asks three questions about performance when you are either a country or a company. In this case, Walker asks the three "performance" measurements about the USA.

1. How are you doing based upon your objectives?

2. Are you getting better or worse

3. And how do you compare to your peers?

His answers, as always, are enlightening and should make Americans want to change our political and economic paradigms ASAP:

Lawrence Cahoone, Ph.D. of Holy Cross College Lectures On "Marx's Critique Of The Economic Revolution"

Here's an interesting lecture on Karl Marx by Lawrence Cahoone, Ph.D. of Holy Cross College titled "Marx's Critique Of The Economic Revolution".

Some of the things you will learn about Marx is he did not hold a high view of peasants or the unemployed (lumpenproletariat) whom he viewed as conservative forces. Instead, Marx chose to pin his energies on the factory workers(the proletariat) whom he felt had revolutionary potential. Hence, "Workers Of The World Unite" was one of the best known slogans invented by Marx.

Marx was not anti-Industrialist. What he was for was more efficient Industrialism. Marx was not anti-labor, but he was very concerned as to who should own the product of labor.

One result of Capitalism which irked and angered Marx: alienation, which he attacked in his Economic and Philosophic Manuscripts of 1844. In these papers, Marx said Capitalism made workers "Entfremdung" . . . or "alien to, not friendly to, themselves".

Alienation means something which should be a part of a worker is taken away from them and made into a "power" which opposes them. Marx felt that when a worker sold his labor to a factory owner (bourgeois), that the worker was selling something valuable of their essence . . . their capacity for creative work. Then at the end of the worker's labor, the bourgeois owns the product of the labor.

There's more discussed in this lecture such as Marx's thoughts on the Ruling Class ("Government and Law serve no other function than the interests of the Ruling Class").

Especially interesting are the readings from "The Communist Manifesto".

Whether you are a Socialist, Capitalist, Anarchist, Libertarian, Communist, whatever, you will enjoy this short lecture on what Marx believed.

Rodney Anderson Says We Are "Absolutely" Heading For Double Dip Recession And In Housing; Robert Shiller Says Housing Optimism Is "Fading"

Rodney Anderson Says We Are "Absolutely" Heading For A Double Dip Recession And In Housing

Latest report from the Case-Shiller Index shows home prices in major cities across the USA dropping. At the same time, despite Quantitative Easing II, rates on 30 year mortgages are rising, not falling. As long term rates rise, houses and big ticket items become less affordable. As rates rise, the pressure will build on home prices to keep falling. As a Fox Business News anchor says in his intro to the following piece, "...no end in sight for the decline in house prices." His first guest Rodney Anderson, author of "Credit 911" tells us long rates have been going up for 6 weeks now and we have still not seen any influx of potential buyers thinking, "You know what? I want to get it (that house and lower rate loan) before it goes higher!"

Anderson also emphatically says, "Double Dip Recession in 2011? Absolutely!"

Is a Double-Dip Ahead for Housing?


Robert Shiller Says Housing Optimism "Fading"

Robert Shiller, Economics Professor from Yale University and the man who co-founded the Case-Shiller Index on Housing is every bit as glum as Rodney Anderson in the previous video. Shiller was interviewed by Bloomberg TV earlier today. He said his latest numbers are not good for the overall economy. He did say this could be a temporary "blip", but if the numbers continue downward, it will mean some big trouble for institutions and people.

Shiller, unlike Robert Anderson, is not as positive that we will suffer a Double Dip Recession. He seems to think Keynesian policy has saved us from a worse fate, that we have seen a mild recovery, but he hedges his words by saying we have to see what will happen next. The question in Shiller's mind is if this is like 1938-1939, when the economy started moving down again, and here today the people are in no mood for more stimulus or bailout packages.

Shiller also says the problem in Housing dates back to artificial government subsidies since 1934, that people are starting to question these subsidies, and that these questions are leading to anxiety and worry which hurts public optimism about the Housing Market.

As Bloomberg TV just removed the video clip from youtube moments ago, you may click here to go directly to the Bloomberg TV site to see the Robert Shiller interview.

A Tale Of Several Cities

Since the Meredith Whitney interview on 60 Minutes aired a little more than a week ago (see 60 Minutes Looks At "Day Of Reckoning" For Our Insolvent States) I have been paying closer attention to the plight of city, county and state governments whose resources are stretched to the breaking point.

I have had no trouble finding daily pieces about the travails of many US municipalities and states. Here's just a scatter shot of stories from around the nation which have run in just the past few days:

Vallejo, CA

http://www.commondreams.org/headline/2010/12/20-6

Every Vallejo man, woman, child & baby would have to fork over $1,500 each . . . just to cover the unfunded pension obligations at this moment. So the city declared bankruptcy in 2008.

Vallejo, a former US navy town near San Francisco, is still trying to emerge from the Chapter Nine bankruptcy protection it entered in 2008.

The city, now a symbol of distressed local finances, is still negotiating with the unions, which refused to accept a salary cut plan two years ago. Paul Dyson, an analyst with the Standard & Poor's credit agency, said Vallejo, which is mostly a dormitory town for Oakland or San Francisco employees, did not have enough local industry to sustain its finances and property tax - a major source of local income - plunged with the collapse of the real estate market. The S&P credit-rating agency has a C rating on the town - the lowest level.

With a population of about 120,000, Vallejo has $195m (£125m) of unfunded pension obligations and has to present a bankruptcy-exit plan to a Sacramento court by 18 January. Since 1937, 619 local US government bodies, mostly small utilities or districts, have filed for bankruptcy, Bloomberg News recently reported. US cities tend to default more than European municipalities as they usually rely on bonds issued to investors, which enter into a default if the creditor misses payments. European towns, by contrast, traditionally depend on bank loans and government bailouts.

San Francisco, CA

http://www.nytimes.com/2010/12/17/us/17bcbenefits.html?hp

Talk about kicking the can further down the road: Retirement healthcare needs of $4.4 BILLION and San Francisco has only put aside $9.7 Million, meaning, SF needs to find another $4.391 BILLION to set aside.

After months of delays, the San Francisco controller’s office announced Thursday that it expected the city to pay $4.4 billion to provide municipal retirees and their dependents with lifetime health benefits.

The city has set aside $9.7 million to cover the costs.

The estimate of San Francisco’s unmet health care liability has been closely watched by ratings agencies, labor unions and other groups concerned about the city’s long-term finances. Moody’s Investors Service downgraded San Francisco’s debt rating in November, citing the enormous retiree health-care obligations, among other factors.

The city has set aside $9.7 million to cover the costs.

The estimate of San Francisco’s unmet health care liability has been closely watched by ratings agencies, labor unions and other groups concerned about the city’s long-term finances. Moody’s Investors Service downgraded San Francisco’s debt rating in November, citing the enormous retiree health-care obligations, among other factors.

To put the $4.4 billion liability in perspective, San Francisco has borrowed $2.6 billion through general obligation bonds in its entire history.

Indiana

http://www.courier-journal.com/article/20101227/NEWS02/312270043/-1/rss

Indiana seeks to pass a new state law allowing the State of Indiana to take over insolvent municipalities and then cut their budget, renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring.

A plan backed by Gov. Mitch Daniels would allow local governments in Indiana to ask for a state takeover and declare bankruptcy if necessary. Daniels says he hopes there won't be many local governments that seek bankruptcy, but says the state needs to have the law clarified and on standby in case it happens.

Republican state Sen. Ed Charbonneau of Valparaiso is sponsoring a bill to outline the procedure. His bill would allow a local government in financial trouble to ask the Indiana Distressed Unit Appeals Board to appoint an “emergency manager” to run the government.

The emergency manager would have the power to cut the budget, renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring.

The bill states that if the emergency manager can't turn around the local government's finances, the unit would be allowed to seek federal bankruptcy protection.

The State Board of Accounts in recent audits has questioned the abilities of the city governments in Gary and Lake Station to “continue as a going concern” because of continued high city spending despite significantly reduced city revenues because of statewide property tax caps.

Hamtramck,MI

http://www.nytimes.com/2010/12/28/us/28city.html?hp

Another old working class town, near death, begs the State of Michigan to allow it to declare bankruptcy.

HAMTRAMCK, Mich. — Leaders of this city met for more than seven hours on a Saturday not long ago, searching for something to cut from a budget that has already been cut, over and over.

This time they slashed money for boarding up abandoned houses — aside from circumstances like vagrants or obvious rats, said William J. Cooper, the city manager. They shrank money for trimming trees and cutting grass on hundreds of lots that have been left to the city. And Mr. Cooper is hoping that predictions of a ferocious snow season prove false; once state road money runs out, the city has set nothing aside to plow streets.

“We can make it until March 1 — maybe,” Mr. Cooper said of Hamtramck’s ability to pay its bills. Beyond that? The political leaders of this old working-class city almost surrounded by Detroit are pleading with the state to let them declare bankruptcy, a desperate move the state is not even willing to admit as an option under the current circumstances.

“The state is concerned that if they say yes to one, if that door is opened, they’ll have 30 more cities right behind us,” Mr. Cooper said, as flurries fell outside his City Hall window. “But anything else is just a stop gap. We’re going to continue to pursue bankruptcy until the door is shut, locked, barricaded, bolted.” (Note: Rock added the emphasis in this paragraph with Italics and Bold.)

Houston, TX

http://online.wsj.com/article/SB10001424052748703548604576038080723678202.html?mod=WSJ_hp_mostpop_read

Houston is so strapped that it is attempting to hit up non-profits to help cover city infrastructure and services . . .

The issue is on display in Houston, where some flood-prone roads are in such disrepair that signs warn drivers, "Turn around, don't drown."

Houston's taxpayers in November narrowly voted to adopt a "drainage fee" to raise at least $125 million a year toward the cost of improving roads and storm-water systems. The city will charge fees to property owners, and it won't grant exceptions to churches, schools and charities.

The city has been tightening its budget. "We're cutting up the city's credit cards," says Mayor Annise Parker. "Everyone who contributes to drainage issues has to share in the cost of correcting those issues."

A number of groups—including schools, businesses, churches and senior citizens—are demanding exemptions. "We'll defeat this," says David Welch, of the Houston Area Pastor's Council, who plans to lobby state legislators in January. "This is really a tax. It is the first time that churches would not be exempt from property taxes," he says. Some opponents have filed suit claiming the ballot wording was misleading.

At a group called the National Council of Nonprofits, Tim Delaney, chief executive, says, "Governments are taking their public burdens and putting them on the backs of nonprofits, at a time when the demand for our services is skyrocketing."

These are just a few stories in the past few days which paint a very bleak picture of what James Kunstler would call "The Long Emergency" during Peak Oil times.

To neglect what is and what you do not want to see is Denial.

Denial was high during the run up to the Dot Com Crash, the Housing Crash and the Credit Bubble Crash.

Today, the stock markets have been on a tremendous bull run built on noticeably low volume. In a time of unaccountable and un-regulated derivatives trading (much of the newer bets funded by cheap money given to the Too Big To Fail boys)much of what is happening in the US stock markets is simply "churn" trades between HFT Bots from different firms, with their algorithmic programmers trying to outwit each other with daily tweaks to their programs, programs which are now, I fear, suckering in the last of the "sheeple" who follow investing newsletters and services built on the premise that Wall Street is not a casino, but Capitalism at its altruistic best.

I have a very bad feeling that in the next 18 months, as more governments big and small in the USA ask for bankruptcy protection, more pensioners and soon to be pensioners will wake up and realize they no longer have a pension. The effect on Baby Boomers realizing they have been wiped out by false promises by corrupt politicians will create an anger and panic which will spill over to the markets as Boomers head for the exits with what remaining capital they might have left in their paltry "retirement savings".

Lastly, let's look at one more frightening and sobering statistical read just published by MyBudget360. The title alone sends chills down any middle class taxpayer's spine. You will want to read the whole post and look over all the graphs and charts under the title "Retirement account fantasy and middle class erosion – 1 out of 3 Americans has zero dollars in a retirement account. From 1950 to 1989 top 1 percent earned roughly 7 to 8 percent of nationwide income. Today it is inching closer to 20 percent resembling pre-Great Depression levels"

Ron Paul, Tom Woods, Jim Rogers and Judge Napolitano Take On the Fed

Watchers of the Fed and supporters of Austrian Economics will enjoy the short interviews Judge Napolitano has with Ron Paul, Tom Woods, Jim Rogers . . . and two guys who did a youtube video of Keynesean vs. Hayek Economics.

Greed With No Bounds: How Argentina's Mafiocracy Sold Out Their Nation To Foreign Kleptocrats, Plutocrats And Oligarchs

Americans would do well to study how the lower and deconstructed middle class of Argentinian people took to the streets after decades of privatization and giveaways to a global corporatocracy. This once public or common wealth of Argentina, when privatized, was usually sold at low slanted bids to criminal insiders at Too Big To Fail Banks, Big Multi-Naitonal Oil Companies, and the like, while Argentinian "insiders" were paid off. These insiders, called Argentinian Mafiocracy in the film, bankrupted their country and destroyed the pensions and healthcare of their people who were the worker bees responsible for building up the wealth over the years.

In this film, you will learn how the richest 10% of Argentina quickly took control of 60% of that nation's wealth through the corrupt machinations of politicians from all parties, and by using corrupt union leaders, lobbyists, bankers, businessmen, the IMF, the World Bank, and other wealthy and soon to be wealthy criminals to do their bidding.

This 10/60 wealth disparity figure galvanized the students, workers and pensioners of Argentina into a Solidarity which took to the streets for years to protest against their corrupt government and Central Bank. Amazingly, here we are in America, at the cusp of 2011 A.D., with 10% of Americans owning 71% of our wealth . . . which is a bigger disparity than that which made Argentinians angry enough to take to the streets!

Instead of a movement of all American workers, retirees, the under-employed/unemployed and the 99ers we have Senators and Congress People trying to block medical care to 9/11 first responders or trying to cut off much needed aid to people who've been unemployed for longer than 99 weeks, while corporate lobbyists for Big Banks, Big Oil, Big Pharma and more are writing bills which Congress rubber stamps, and Wall Street banksters are raking in hundreds of billions of dollars in bonuses and bitching about it in the nation's media.

As you watch this enlightening film about Argentina, keep in mind the allegories your critical mind will find and overlay with what has been going down in America since the "Reagan Revolution".

In many ways, this film is disheartening as it shows un-regulated greed abetted by a compliant government will soon enough bring a country to its knees. But in another context, this film is uplifting because it shows what a angry majority of lower class and middle class people are capable of when they unite:

p.s. I had no sooner put this post up on my blog when I clicked on James Kunstler's latest from his "Clusterfuck Nation Blog" titled The Moment of Convulsion. Here are the first three (continued below Part 1 of the 12 Part Film)

Part 1

paragraphs from it which tie in nicely with the film you are about to watch:

A little ways off the curb on the Boulevard Henry IV here in Paris, you can see the memory of the Bastille outlined by a course of masonry in the pavement, in particular one of the bulbous towers of the old fortress-prison. It marks one of those threshold moments in history when things got out-of-hand - in the late afternoon of July 14, 1789 - and by the time a mob had detached the head of Warden Bernard-René de Launey from his shoulders and paraded it around on a pike, everyone in the city knew that they had crossed into the politically unknown frontier of Revolution.

Seeing this residue of history put me in mind of a riddle that one of my college professors presented to us one day years ago: why did Achilles drag Hector around the city of Troy three times? We came up with dozens of reasons ranging from conjectures out of the text of The Iliad to lame bits of Hippie numerology, but nobody could furnish the answer that the prof was looking for, which was eventually revealed: Because he [Achilles] was just that pissed off.

This was the idea that dogged me in the winter twilight of Paris late on Christmas Day as I pondered the fate of my own country back across the cold cold sea. A lot of Americans are beaten down and discouraged these days. They've lost not only jobs, incomes, and houses, but also a sense of purpose, and perhaps faith in the essential fairness of the American venture - as the propane runs out, and families try to subsist on Froot Loops, and the re-po squad turns up to haul away the Ford F-150 Raptor. Meanwhile, in their last remaining refuge from harsh reality, TV, they glimpse the likes of Jamie Dimon, Chloe Kardashian, and Jay-Z emerging from limousines looking hopelessly bored with wealth beyond imagination. When will the folks out theremove from shame and despondency to being really pissed off about the disposition of things?

Isn't that a question, though?

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Housing Will Double Dip In 2011: Two Housing Experts, Dolly Lenz & David Lykken

Douglas Elliman Vice Chairman Dolly Lenz and Mortgage Banking Solutions President David Lykken offer their outlook for the housing industry, and it isn't pretty.

Both of them are basing their bleak look on Huge Inventory + Stealth Inventory, Rising Interest Rates during Quantitative Easing II, and Rising Property Taxes.

Yves Smith of Naked Capitalism: Loan Servicing Biz Explained - Foreclosures On People Who Never Missed A Payment

Yves Smith and her blog "Naked Capitalism" are one of my weekly "must reads" and I've been linked to her blog on the Watchworld ever since our inception.

Here, we get to see Yves go through the paces on the foreclosure fraud mess, focusing mostly on the Loan Servicers link in the chain of the foreclosure mess. She more than adequately explains why foreclosing on people, instead of modifying their loan, is the top priority for Loan Servicers.

Below this video are my notes on what Yves sets down. It is not an absolute transcript, but reasonably close.

My Notes from the above interview of Yves Smith:

The Mortgage Servicing industry is a new industry sprung up around this new process of doing mortgages today called “securitization”.

In the old days of banking, the borrower would go to the bank and get the loan, and the loan would remain with the bank.

The change we had, which started in the 1980s, and which has now become the predominant way . . . at least for the way first mortgages are done . . . is you go to the bank, you might even go to the mortgage broker, and you’ll get the loan with them, but instead of keeping the loan, they will sell it. And this (loan the borrower took out) will usually not go to just one party, but it will go to a series of parties. Eventually the loan will end up with a series of investors in a legal box called a “Trust”.

Now this means someone has to somewhat play the role the bank of the old days used to play in collecting payments on the loan. So the Mortgage Servicing industry is the party which gets the payments, its the party which credits the payments, it is the party which takes all the cash from all the people the banks are dealing with and makes sure the cash is properly sent to all the parties the way the contracts are drawn up.

Lending Process Servicing Company is the company which most of the time intercedes for a bank to begin foreclosing. This company gives a lot of support to the lending Servicers in the foreclosure field. For instance, this is the company which hires a “foreclosure mill” to begin foreclosing on a homeowner.

What normally happens is the Servicer normally notifies the borrower that they are behind . . . only very late in the process. The supposed payments behind have gotten so large that the borrower is usually very surprised by the large amount of money being demanded by the Servicer . . . if its because of the compounded fees that they are in that unenviable position

Keep in mind it is the Trusts (which shelter Investors) which hires the Loan Servicers. The sequence runs like this:

1. The Trusts hire the Servicer.

2. The Servicer’s imperative is not whether someone is to be foreclosed upon. Instead it is focused on “keeping costs down”.

3. The Servicer does its work inside a big office like factory where processes are mostly automated.

4. And the Servicer has imperatives to Maximize fees. Foreclosures happen to be more profitable than routine servicing of a loan.

5. Hence, Servicers have no incentive to help people from getting in trouble. In fact, they have incentives to get people in trouble.

Yves goes on to point out one diabolical thing a Service will do. She says suppose a borrower already has one late fee. In many cases, these late fees are not bona fide late fees as the servicer applied the payment late as it circulated through the intestines of the servicing "factory". More insidious, Servicers have also been found to “hold” payments sometimes so as to purposefully make the borrowers late.

Here’s what happens with these late fees:

Let’s call the month when a first late fee payment is assigned Month #1:

1. The late fee will not be applied until the next month’s bill, or Month #2.

2. Currently, the borrower tears out another payment slip from his/her mortgage payment books and sends in their Month #2 payment. At this moment, they have no idea they are being assessed a late fee by the Loan Servicer . . . which for this example, let’s say is $75.00.

3. Eventhough the borrower sends in their regular payment for Month #2 on time - which by Federal law is supposed to go against mortgage principal and mortgage interest - the Loan Servicer instead will subtract the late fee from Month #2’s on time payment . . . which makes the second month’s payment short. This shorting of Month #2’s payment by the Servicer also makes Month #2’s . . . in theory . . . late . . . because it is (in the eyes of the Servicer) not PAID IN FULL.

4. Thus, in this example, another late fee is applied on top of a bogus late fee. And maybe an extra fee is charged on top of that.

5. Well, when a borrower has been late twice under the agreement, the investors require the Servicer to get something called a “Broker’s Price Opinion” (which Yves claims is kind of worthless). All this is is some broker drives by the house and makes some opinion about the real price of the house during his drive by.

6. This “Broker Price Opinion” costs somewhere between $150 - $250 for this “drive by”. This “Broker Price Opinion” is supposed to be charged to the investor(s) in the Securitization. Many times, the Loan Servicer has been found to “double dip” and charge the borrower also.

7. So now, we many times have a borrower who is tagged with two late payments(and maybe another surreptitious hidden charge on Month #2’s supposed late payment) AND many times they are assigned a “Broker Price Opinion” charge which legally the Investor(s) are supposed to pay, not the loan borrower.

8. These usurious, illegal fees compound.

Now here are the reasons why it is more profitable to push into foreclosure:

1. When the borrower goes into foreclosure, the Servicer is allowed to charge more and bigger Servicer Administrative fees.

2. These new fees for foreclosing come right off the top.

3. Also, if the borrower gets seriously delinquent, the Servicer still must continue to make the payments to the Investors as if the borrower were still making the payments on time.

Normally, whenever you have a borrower get in trouble, in any type of lending, the first thing the lender says is “Should I liquidate the loan, should I take what I can get, or is there some way we can restructure the loan?” Yves comments, “I’m always better taking half a loaf . . . if the borrower has enough income, I’d be better served by taking less and restructuring the loan.

Hence in our above case, the Investor(s) would be better served by having the loan restructured; however, the Servicer is having to advance principal and interest, the Servicers do not get paid for modifying loans (hence they have no Economic incentive to modify the loan), and the only way for the Servicer to recoup the money it has been sending to the Investor(s) is to foreclose on the borrower. The reason for this is the Servicer can foreclose on the house, sell it for whatever they can get, take their fees out of the sale before anyone else, and send the remaining money to the Investors.

All the incentives for the Servicers favors foreclosure. None of the incentives favor loan modification.

Yves goes on to say that academics have covered many, many stories about people being foreclosed upon and they haven’t missed a payment. She contends the reason lenders will make up fraudulent documents to take away an on time borrowers home is there is more money to be made in the foreclosure process than remediation.

Yves says banks want to paint the problem as one of where borrowers are deadbeats, and she acknowledges that many borrowers can no longer afford their homes due to loss of jobs, a medical emergency, etc. On the other hand, a very significant amount of the people who are actively fighting foreclosure are victims of Servicer error and they can’t get it straightened out . . . OR . . . they have actually filed for bankruptcy, and in bankruptcy, everybody who has filed to collect money from the borrower is supposed to wait ‘til the court sorts it out.

Yves says Servicers keep trying to take the house before the bankruptcy process has been worked out fully. She says many unsophisticated borrowers and unsophisticated borrowers’ lawyers . . . they will make deals with banks the first time banks come for the house, and the deals are very unfavorable to the borrower who might have had grounds to hold on to their house.

Lastly, the banks are drawing out the process of foreclosing s-l-o-w-l-y because the banks don’t want to sit on all this Shadow Inventory all at one time.

Banks don’t want to be responsible for paying taxes and insurance on these houses and want to keep those losses off on Servicers until the last minute. It’s better for banks in destroyed Real Estate markets to stay in the house, to maintain the house, to pay the RE taxes and insurance, than it is for the bank to take it back, add it to stealth inventory, and have the house sit empty eating a hole in the banks’ books.The Mortgage Servicing industry is a new industry sprung up around this new process of doing mortgages today called “securitization”.