While the Center for Disease Control (CDC) placed a hold on the rents, the owners of the mortgages still have to pay. This fact sounds very obvious, but they do have to pay, because those mortgages were sold with the idea that they would be repaid. The institutions that own the mortgages don’t care about the CDC halting rent, as long as they get paid.
Mortgage Back Securities, how the wealthy plays with your retirement
Lew Ranieri, in 2004 was named by BusinessWeek “one of the greatest innovators of the past 75 years” came up with a brilliant idea. His idea was taking mortgages and bundling them together, and then they would sell off chunks.
Ranieri created five and 10-year bonds from 30-year mortgages. Attracting investors and taking mortgages off the banks’ book. This action allowed banks to issue new mortgages as the existing ones were divvied up and sold.
These mortgage backed securities (MBS) were very popular with retirement funds. Retirement funds are always required by laws to have AAA labeled bond investments. MBS are AAA because it was thought that housing never fails.
Housing never fails, in theory, but theories can go very wrong
MBS were viewed as safe because your house is usually the last thing you give up when everything goes to hell.
After September 11, Alan Greenspan announced that for the foreseable future, Fed interest rates would stay at zero to stimulate the economy. Because Federal Bonds at 0 interest would be eaten by inflation, investors looked for other investment vehicles. So MBS became very popular, but there was a problem, there wasn’t enough for the market demand. This led to the push for deregulation and loosening the financial rules of who could purchase a house so mortgages could be issued and turned into MBS.
Where they got in trouble in the aughts was after September 11 — in order to prevent a recession, the feds announced that the interest rate would be set to basically zero.
Interest rates, when they fall you lose invested money
For a bondholder, this is bad. If inflation is outstripping your interest rate, that means your money is losing over time.
Companies like Magnetar deliberately set up MBS and filled them with mortgages they predicted would fail, and took out massive amounts of insurance on it.
That was called the Magnetar Strategy.
By 2005 all the good mortgages were gone. YET Magnetar kept the market party going another year, even though all that was available was junk.
When the mortgages failed beyond a specific rate, the whole MBS failed.
The wealthy bet against you losing your house, set up scenarios so you would lose your house
And that rate was as low as 8%. I know it doesn’t take much.
Then the “Go Lemmings Go” event began to collapse major parts of the economy. People were no longer buying large amounts of property on speculation. That speculation on real estate supported an entire infrastructure that also collapsed as the demand slackened. And with the slack demand for speculative real estate, many realtors, bankers, home builders, and vendors also lost their jobs. Since many of these people were buying lots of properties with subprime loans, when they lost their jobs and lost their property, housing that was left became less valuable.
Job losses and defaults sucked the prices down because you had this massive amount of property on the market, but no one could buy.
Mortgage backed securities set up the non-wealthy to fail
At this point, the conservatives usually jump-in and get real self-righteous and say that this is where irresponsible individuals took control of our market and ruined it.
However, their argument is undercut as Wall Street realized they were selling junk and even started betting against it, by taking out insurance: the Credit Default Swaps.
(Watch “The Big Short” for a dramatization of a few individuals that profited from this windfall. )
After the fall of the market in 2007, a lot of these bonds were completely toxic, trash, poisonous, but even beyond that, you had this exponential collapse.
How do you know when the housing market is about to collapse? Be wealthy
One way you can detect the housing market’s strength is to see if people are betting against it in forms of credit default swaps. You figure that out if you know someone on the inside, someone aware, watching, and willing to give you an honest appraisal. And no one is going to tell you, because that knowledge is incredibly valuable, it can blow up and hurt a lot of people, and a privileged few will make A LOT OF MONEY.
In 2007 when the market exploded, the banks started taking out CDO on everyone else’s mortgage back securities. It was if today they took out fire insurance on your house in Oregon as the fire was sweeping towards it to incinerate, but didn’t tell you about your imminent ruin and made sure the media didn’t write about it.
Isn’t the stock market booming? Yeah, but have you heard of bubbles?
Currently, in some ways, the economy has been booming. Housing properties are going up, and after everything that has happened, you would think that MBS would be banned.
MBS were not banned.
Mortgage Backed Securities are still entirely legal!
The financial community made sure they survived, but they are still extremely susceptible to market hiccups, and now we have the problem of the landlords who invested heavily in housing for two reasons:
1. Because housing in the city has been going up in price and rent has gone up.
2. There is a new device called Air BnB. Air BnB for a landlord in a hot area is an amazing proposition, because you make more money than renting on a monthly rate for maybe two weeks or less. You can invest in a property and hold it, and since you don’t have leases, it’s effortless to sell the property.
This has driven speculation in areas like Manhattan. Which, for a large part, is no longer controlled by the local landlord, but international landlords. However, there are still some little guys out there who will probably be very susceptible to this sort of crash as their reserves will be commensurately smaller.
They are the ones on your neighborhood groups who are very angry that people aren’t working to pay their rent during a pandemic.
Small and midsize landlords can’t pay their mortgages, only 7-9% need to fail to crash Mortgage Backed Securities
So now we return to the CDC having a rent freeze. This is cutting into the landlord’s cash flow. At some point, these mortgages will go from 60 days to default, and it doesn’t take but a couple of percentage points of these things failing to crash an MBS. Remember, I told you in the aughts; it was 8%. The big guys may be fine if they have sufficient cash reserves (but don’t bet on it.) The real danger is to the wanna-be capitalists. They are the small to midsize landlords who are not getting money. Like everything else in our economy, they are operating on a very thin margins. Look at the current crisis in retail. Century 21, Lord & Taylor, J.C. Pennys are either closing or are sold.
The world is bigger than Manhattan. This is taking place all over the country, Las Vegas, Madison, Iowa, Atlanta, and where you and/or your parents live.
How does this impact you? Your retirement and remember he’s trying to cut social security
Consequences for you:
Your retirement fund could fail or have a severe decline in value. If you are already retired, your monthly check could drop.
What is your retirement fund invested in? You need to find out now, even if you’re retired, you need to find this out right now. You might need to find a safe haven.
And the sad thing is, I’m a writer. I’m not an economist or investment banker, why am I the first person you’re hearing this from?
I have no idea why this is the first time you’re reading this
So you want to put your nest egg in cash. The problem with cash is that the value of cash crashes when the economy crashes. Also money can be stolen from you. From a broader standpoint, the economy can enter a liquidity trap. Everyone starts hoarding cash, and then there isn’t any for private institutions to loan out to restart it. Worse, if the government prints money, it causes a deflation event. Seen in Germany right after The War to End All Wars.
The problem with gold is that its value will soar and become even harder to turn into cash. And once people find out you’re holding gold (which you will have talked about in FB, yeah don’t do that), they’ll just kill you and take that and keep it moving. Oh, you have a gun to protect your gold? At some point, you have to go to sleep. A TAC-50 can kill you in your bed at two miles.
Stipends are the solution that we need now! We can’t sit back and just let the rich feast off our misery
A solution that we need:
We need stipends. Everyone needs stipends to prop up this house of cards. It will only take one mistake for this to crash in a horrible way.
Teka Lo, Public Intellectuals