by davidlosh@davidlosh.com » Wed Jul 01, 2009 6:08 pm
The loan modification and government loan programs are, in my opinion, ways of generating new mortgages.
The money is made by generating the loan, for a fee, then servicing the loan for a fee, and then selling the loan to an investor, for a fee, while continuing to service the loan for a fee.
If you hold enough loans, notes actually, in your portfolio that you service it eventually adds up to real money.
A 1% servicing fee on a million dollars is very little, but 1% of a billion can add up. At today's loan amounts a million is easy, a billion takes a few weeks.
I took issue a few weeks ago with a short sale article on another blog. It frustrates me that people in the mortgage and Real Estate business refuse to see what has happened in the credit markets.
Credit is trillions of dollars trading hands every minute of every day. People talk as if the economic stimulus package is large bundles of dollars. It's credit. Worse, it's the promise to pay with future dollars.
After that you have the discussion of inflation versus deflation. Will those future dollars be worth more or less, in the future?
Let's pretend we are at the end of the game. No one wants to call it quits, but let's pretend that today every one just hunkered down and paid off debt. When we make money we pay living expenses and pay off our debts. What happens?
What if, rather than modify your loan you concentrate on paying it off? How would that go? What if you actually got into the game and did whatever you had to do to get out of debt?
The banks would continue to make the servicing fees, investors would have more money to invest, and you would become financially solvent.
The problem is you are not generating new loans. Investors have fewer loans to buy, loan originators have fewer loan generation fees, and there are fewer future inflated dollars. You would be paying today's debt with today's dollars which circulates real dollars back into investors pockets and they have fewer investment opportunities except in commodities.
You are buying less and paying more on debt. As the commodity prices go up you pay more for living expenses. You pay higher prices for food and heating oil. That leaves you less to pay on your debt.
So coming or going you pay, we all pay. The investors get the reward of us using their dollars.
It's the investor's dollars. If you own stock, that's you.
Now wait, there's more. You own stock in a company like GE. You want them to make a profit. Buying and selling corn futures may get a profit, but financing the purchase of corn for the production of ethanol can get you real dollars.
Here's the point, your debt is generating more profit than oil, food, and durable goods orders. No one wants you out of debt. Everything in this macro economic discussion is focused on you being in debt, in default, generating fees, and paying interest.
The loan modification is a carrot. it keeps you current on other debt. It keeps you protecting your FICO score so you can get more debt in the future.
Debt, keeping you in debt, is the goal.