Unfettered capitalism has its drawbacks. The two most notable among them are key issues in the housing bubble and bust: Ponzi schemes, and monopoly price fixing. Ponzi schemes are destructive because they create artificial demand for goods and services based on unsustainable growth in investment or debt.
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going.
The system is destined to collapse because the earnings, if any, are less than the payments to investors.
In the case of a debt-based Ponzi scheme like the housing bubble, the payment of interest is made from fresh issuance of debt rather than income from wages or from rents. The system is destined to collapse because it depends on lenders extending ever-increasing amounts of credit. When lenders stop the music, credit violently collapses, and borrowers are exposed as insolvent because they can’t make payments from income or rent.
While the Ponzi virus is spreading, lenders inflate asset values by continually increasing loan balances. Each successive buyer is leveraged more than the last. When the Ponzi scheme collapses, lenders are left with many loans far in excess of what borrowers can repay with their wage income. As a result, lenders are faced with unsavory choices:
- They can foreclose on delinquent debtors, recover a portion of their original capital, and write down their losses.
- They can amend and extend loans and pretend borrowers will repay under the modified terms.
- They can lower interest rates to increase loan balances to improve their capital recovery (if backstopped by the government who absorbs the risk of further loss).
- They can regulate market supply to control market pricing to improve their capital recovery.
Of the three options available to them, ordinarily banking regulators would have forced them to recognize their bad loan losses, foreclose on delinquent borrowers, and recover what they could of their original capital. If regulators had forced that course of action in 2008, the entire banking industry of the United States would have been exposed as insolvent, and the government would have been forced to nationalize the banking system, and management would have been thrown to the wolves. That’s what should have happened. However, instead of nationalizing the banks, we designated them too big to fail and bailed them out with a blank check and gave the managers obscene bonuses.
Since what should have happened didn’t happen, lenders have resorted to their other three options: amend-extend-pretend, lowering interest rates to increase loan balances, and regulating the supply of properties on the market to fix prices. Amend-extend-pretend is a proven failure as 50% or more of loan modifications redefault within a year. Lower interest rates help, and that’s why we have record low rates today. However, their final policy option has a big problem with this everyone is ignoring: Price fixing is illegal.
Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand.
The intent of price fixing may be to push the price of a product as high as possible, leading to profits for all sellers but may also have the goal to fix, peg, discount, or stabilize prices. The defining characteristic of price fixing is any agreement regarding price, whether expressed or implied.
Price fixing requires a conspiracy between sellers or buyers. The purpose is to coordinate pricing for mutual benefit of the traders.
In the United States, price fixing can be prosecuted as a criminal federal offense under section 1 of the Sherman Antitrust Act.
Colluding on price amongst competitors, also known as horizontal price fixing, is viewed as a per se violation of the Sherman Act regardless of the market impact or alleged efficiency of the action.
America learned the perils of unregulated monopolies in the nineteenth century. Wikipedia notes this about anti-competitive behavior.
It is usually difficult to practice anti-competitive practices unless the parties involved have significant market power or government backing.
Right now, lenders control more than two-thirds of all sales with short-sale approvals or REOs. They are encouraged by the federal reserve, and backstopped by government regulators who look the other way.
Monopolies and oligopolies are often accused of, and sometimes found guilty of, anti-competitive practices. For this reason, company mergers are often examined closely by government regulators to avoid reducing competition in an industry.
Although anti-competitive practices often enrich those who practice them, they are generally believed to have a negative effect on the economy as a whole, and to disadvantage competing firms and consumers who are not able to avoid their effects, generating a significant social cost. For these reasons, most countries have competition laws to prevent anti-competitive practices, and government regulators to aid the enforcement of these laws.
In the nineteenth century trusts controlled nearly every aspect of our economy. Nearly every good or service was provided by a monopoly at a considerably increased cost. The monopolies provided fewer alternatives and lower quality products because they were not driven to improve by competition. The nineteenth century consumer paid a lot of money for low-quality products.
Things were so bad that in 1890, Congress passed and the President signed the Sherman Antitrust Act.
It prohibits certain business activities that reduce competition in the marketplace, and requires the United States federal government to investigate and pursue trusts, companies, and organizations suspected of being in violation. It was the first Federal statute to limit cartels and monopolies, and today still forms the basis for most antitrust litigation by the United States federal government.
The purpose of the Act was, to quote Sherman: “To protect the consumers by preventing arrangements designed, or which tend, to advance the cost of goods to the consumer”.
Isn’t the behavior of the banking cartel in direct opposition to the basic tenets of the Act? Isn’t the cartel’s sole purpose for withholding inventory to drive up the price of goods to the consumer — for today’s homebuyers?
The answer to both those questions is clearly “yes.” The banking cartel is operating on classic monopolistic model of reducing supply to artificially jack up prices to force today’s buyers to pay a higher price than they would in a truly competitive market.
Put another way, it has sometimes been said that the purpose of the Sherman Act is not to protect competitors, but rather to protect competition and the competitive landscape. As explained by the U.S. Supreme Court in Spectrum Sports, Inc. v. McQuillan 506 U.S. 447 (1993),
“The purpose of the [Sherman] Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, even severely so, but against conduct which unfairly tends to destroy competition itself.
Right now we are seeing the results of anti-competitive behavior in the Orange County housing market. Inventory has fallen off a cliff because lenders have decided not to foreclose on delinquent mortgage squatters (thanks to unenforced regulations) and put the resulting inventory on the MLS.
Any first year prosecutor could establish that lenders are in violation of the Sherman Antitrust Act. The real question is why is nothing being done about it? I think we all know the answer to that: the banking lobby has too much power.
The idea that bankrupting our banking system would trigger a depression is bullshit. We could have wiped out the stockholders, forced the bond holders to take a haircut, and recapitalized the banks with fresh money from the government. The government could have sold it’s holdings for a profit once the banks became profitable. That’s what happened with Bears Sterns, Lehman Brothers, and Citibank, and the world didn’t come to an end.
What we have today in banking is a cartel (or perhaps an oligopoly) made of of eight too-big-to-fail banks, Bank of America, Bank of New York Mellon, Citi, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and Wells Fargo. Through their lobbying efforts and the federal reserve, they control any key decisions in Washington concerning banking policy and regulation. They have unlimited government backing, and they can speculate wildly without fear of substantive reprisal. The taxpayer will absorb any losses.
California Attorney General Kamala Harris made headlines recently for her pandering to loan owners. If an enterprising and politically ambitious Attorney General wanted to make a real splash, they could prosecute the leaders of the too-big-to-fail banks on racketerring charges under the Racketeer Influenced and Corrupt Organizations Act.
The Racketeer Influenced and Corrupt Organizations Act, commonly referred to as the RICO Act or simply RICO, is a United States federal law that provides for extended criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization. The RICO Act focuses specifically on racketeering, and it allows for the leaders of a syndicate to be tried for the crimes which they ordered others to do or assisted them, closing a perceived loophole that allowed someone who told a man to, for example, murder, to be exempt from the trial because they did not actually do it.
Under RICO, a person who is a member of an enterprise that has committed any two of 35 crimes—27 federal crimes and 8 state crimes—within a 10-year period can be charged with racketeering. Those found guilty of racketeering can be fined up to $25,000 and sentenced to 20 years in prison per racketeering count. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of “racketeering activity.” RICO also permits a private individual harmed by the actions of such an enterprise to file a civil suit; if successful, the individual can collect treble damages.
This is a great way to clawback some of those obscene bonuses the banksters have enjoyed while the rest of the country paid the price for their excesses.
Four years of squatting
If banking regulators weren’t permitting amend-extend-pretend, the former owner of today’s featured property would have been forced out in early 2009. Instead, she was allowed to stay and not pay for a very long time.Prior Transfer Recording Date: 04/03/2012 Sales Price: $480,000 Foreclosure Record Recording Date: 03/06/2012 Document Type: Notice of Sale Foreclosure Record Recording Date: 07/06/2010 Document Type: Notice of Sale Foreclosure Record Recording Date: 12/30/2009 Document Type: Notice of Default Foreclosure Record Recording Date: 04/16/2009 Document Type: Notice of Rescission Foreclosure Record Recording Date: 02/27/2009 Document Type: Notice of Default Foreclosure Record Recording Date: 02/27/2009 Document Type: Notice of Rescission Foreclosure Record Recording Date: 12/02/2008 Document Type: Notice of Default
Lake Forest Overview
Median home price is $345,000. Based on a rental parity value of $488,000, this market is under valued.
Monthly payment affordability has been improving over the last 5 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis increased to $221/SF to $223/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates declined $16 last month from $2,066 to $2,050.
Rents have been rising for 12 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 9
$514,900 …….. Asking Price
$352,500 ………. Purchase Price
9/14/2000 ………. Purchase Date
$162,400 ………. Gross Gain (Loss)
($28,200) ………… Commissions and Costs at 8%
$134,200 ………. Net Gain (Loss)
46.1% ………. Gross Percent Change
38.1% ………. Net Percent Change
3.2% ………… Annual Appreciation
Cost of Home Ownership
$514,900 …….. Asking Price
$18,022 ………… 3.5% Down FHA Financing
3.75% …………. Mortgage Interest Rate
30 ……………… Number of Years
$496,879 …….. Mortgage
$135,433 ………. Income Requirement
$2,301 ………… Monthly Mortgage Payment
$446 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$129 ………… Homeowners Insurance at 0.3%
$518 ………… Private Mortgage Insurance
$105 ………… Homeowners Association Fees
$3,499 ………. Monthly Cash Outlays
($350) ………. Tax Savings
($748) ………. Equity Hidden in Payment
$23 ………….. Lost Income to Down Payment
$84 ………….. Maintenance and Replacement Reserves
$2,507 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,649 ………… Furnishing and Move In at 1% + $1,500
$6,649 ………… Closing Costs at 1% + $1,500
$4,969 ………… Interest Points
$18,022 ………… Down Payment
$36,288 ………. Total Cash Costs
$38,400 ………. Emergency Cash Reserves
$74,688 ………. Total Savings Needed
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