Homeowners could always raise money by getting second mortgages on their properties. Sometime during the 1970s someone, probably in banking, came up with the idea of splitting these mortgages up into many different pieces and selling each piece to a different owner. By the early 1980s, and this was the time of President Ronald Reagan and pure capitalism, Hedge Funds were set up which took fractional shares of each mortgage putting them into different Hedge Funds. The point here was if some of the mortgages didn’t pay occasionally the dividends would still be large enough to justify the existence of the Hedge Fund. These were considered absolutely safe investments. American mortgages had become a form of massive investment securities.
Meanwhile executive pay rose into the multimillions and wages rose very slowly and very slightly, not even keeping up with increases in productivity. Most banks, particularly the larger ones like Bank of America or Wells Fargo, encouraged their customers to finance and refinance their homes, to use their domiciles as bank accounts, in order to buy whatever they desired. One of the arguments being that continued refinancing continually raised the value of the property, therefore what they withdrew was practically free money. People were spending the ever increasing profit in their homes, not worrying about ever paying off their mortgages. Consequently the continued fees in doing this were also absorbed by the continued increases in the value of the property. Seemingly it was a no lose situation for both the banks and their customers.
In places like California people tended to move every five years, replacing their home with a larger more expensive abode. A lot of individuals bought into this continual refinancing program. Many of these people made up the group that the banks needed and wanted to carry out their programs. The banks and many of their employees made fortunes in fees and refinancing. The homeowners tended to live as though they were earning three or four times as much as they actually earned. It created a housing fantasy or bubble that lasted until 2007.
Actually the crash did not come until 2008. Most of the bankers were in denial that the system could fail; it had lasted for twenty-seven years, most if not all of their careers. When the crash came many of the banks were suddenly at the point of bankruptcy. President George W. Bush and his Secretary of the Treasury, Hank Paulson, lent money to the banks to keep them solvent.
Basically what happened was that the distribution of funds throughout the economy broke down; most of the wealth went to the upper few percent of the society; it was not shared. More money was needed for the country to function properly. Much more of the wealth produced should have been applied to wages. In addition the Federal Reserve, which is a dynamic institution, should have supplied more cash to the economy but its longtime chairman, Alan Greenspan, did not believe in doing this, particularly since it had not been done earlier. Also the increases in worker productivity should have been compensated in increased wages. Instead they went into increased profits which ended up in greater compensation for executives and higher dividends for stockholders.
What occurred from the 1980s was a more rapid separation between worker salaries and executive compensation. More and more of the wealth produced in dollars went to the upper few percent. More and more inequities were being built into the society. The general public were being compensated by the flow of cash being supplied by the banks in creating the housing bubble. This would last until 2008 when it all came crashing down.
In 2008 practically overnight the value of the dollar dropped like a heavy lead weight. Many people suddenly owed more on their homes than they were then worth. A percentage of these homeowners just took off, deserting their domiciles, others stayed but could no longer afford to make the payments. They were either unemployed or had lost a large percentage of their commissions.
The pattern many banks had followed was to issue mortgages, then sell the mortgages to Hedge Funds or set up their own Hedge Funds, retrieve the cash they had invested, and lend out the money again. This pattern was repeated over and over again. It was practically an endless process. The banks got their initial cash back and administered the loans for an endless cycle of fees.
Since the banks believed in speed and efficiency they had set up their own recording concern. Going through the traditional process of recording all these transactions was too slow. The problem that came into being was that the endless recording that this agency did was fraught with errors so that when the time came to check out the ownership of the financing and continued refinancing, the records were worthless. In actuality there were no real records. Mortgages could have been split into a hundred pieces or more, each going to a different Hedge Fund. In essence there were so many owners that no one owned enough of a mortgage to have any control of it. Actually no one owned these mortgages.
Initially the banks had shredded their mortgages once they had been sold to the various Hedge Funds. After the crash a number of banks printed up new documents of ownership to the homes they processed but did not own and then began a process of foreclosure and resale of these homes, keeping the money they made from this process. The entire transaction was illegal.
Seemingly there was no objection on homes that had been deserted. But where people continued to reside many were illegally pushed out of their homes by banks that didn’t really own the mortgages on these houses. Cases came up and were heard at the local courts.
Interestingly a number of lawyers were disbarred for daring to suggest that the banks were dishonest. It seemed that many judges could not believe that banks would forge documents. I would assume that when this was later proven many former lawyers got their licenses back. The banks were heavily fined in the hundreds of thousands of dollars and some homeowners did collect some money for having lost their homes; no one went to jail for the fraud committed.
What happened, when Barack Obama became President in 2009, the country was on the edge of going into a depression that could have been far worse than the Great Depression of 1929. The entire economy of the United States could have totally collapsed. It was, after all, based upon the use of the banks. This could have spread to Europe and Asia bringing about a massive world depression.
If the U.S. banks had been allowed to go bankrupt the entire movement of money in the country would have practically stopped. The collapse of businesses would have accelerated as massive funding would have disappeared. Unemployment could have reached 75% or higher. There would have been starvation and riots as the economic system disintegrated. It would have taken years both in property ownership and bank usage for the country to work its way out of the disaster caused by the banks.
Instead President Obama and his administration took control of the situation and changed what could have been a massive depression into the Great Recession. Unemployment which could have been unimaginably high in 2007 was at 4+%. By 2009, President Obama’s first year in office, it reached 8%. In 2010 it rose to 10%. Thereafter if gradually dropped to 5% by 2016. Through the use of money a potential massive depression was changed into the Great Recession which returned the economy to essentially normal conditions by the end of President Obama’s second term in office.
The period was known as the Great Recession. By, among other things, lending massive amounts of money with interest charges to the banks and the American automobile industry the President brought the country out of imminent disaster and back to recovery over his two terms in office.
In addition for a little over two years during his second term in office President Obama and his Chairman of the Federal Reserve, Ben Bernanke, bought back 50 billion dollars’ worth of housing loans pieces monthly and shredded them while adding another 50 billion dollars to the economy. By the end of this period, when Janet Yellen became Chair of the Federal Reserve the amounts were reduced 10 billion monthly until they reached zero.
This process supplied money to the economy. A goodly percentage of people, for one reason or another, had stopped making mortgage payments on their homes. Some had lost their jobs and didn’t have money, others had reduced funds, and still others had retirement funds dry up. For whatever reason payments were no longer being made and people were not being dispossessed. Generally there was money available which should have been allocated to home payments but was being kept by some of the homeowners. Much of this money was being spent on other things like restaurant dinners and entertainment. There was quite a bit of money out in the society which the Federal Government was indirectly supplying.
No one, not even the government, knew specifically which homes the Federal Government owned. People were able to live in these houses without making any payments. Those that had money largely spent it. As long as property taxes were paid on these homes the people could freely live in them. Where property taxes were not paid the houses were picked-up by wealthy retailers for payments of back taxes, generally fixed up, and rented out or sold.
Some rich people got much richer in this process. No doubt these people started out in that condition. A percentage of the homes ended in their possession as rentals. They could also sell the houses. The process helped to rebalance wealth in the hands of the few and further reduce the middle class.
In any event largely in a decade or less it would solve the ownership problem for most of these unowned homes. Without this solution the problem could have dragged on for thirty or forty years or longer. The banks did a fantastic job of fouling everything up. President Obama solved the problem and brought order to the economy. The price of doing this was indirectly paid by the taxpayers. A relatively small group within the country made billions of dollars. It was expensive but it avoided a depression greater than that of 1929.