The Weiner Component #26 – Monetary Policy & The Real Estate Market

English: President Barack Obama confers with F...

According to an article on the first page of the Business Section in the Sunday, February 17, 2013 issue of the L.A. Times there is now a shortage of residences available in the Inland Empire housing market, the epicenter of the Southern California housing crash.  There was earlier a profusion of foreclosed housing available there, many more than there were people available to occupy them.  The paper’s position is that “there is a flood of all-cash offers from investors,” with “some backed by Wall Street war chests.”  Now there is a large shortage of properties and new construction is occurring.

Is this true?  Yes, but it doesn’t make the point that they are indicating in their article. These houses have been in the process of being bought-up since shortly after the Housing Crash in 2008 for virtually pennies on the dollar, many of them illegally since the banks that sold them in short sales or otherwise did not really own them; their mortgages had been broken up into innumerable real estate bundles that were then marketed as Hedge Funds.

In point of fact the banks after the 2008 crash and during the government financial bailouts were funding mortgages on a very reduced level.  They required buyers to have good financial records and put down at least twenty percent of the cost of the houses in cash; something most people could not do.  They always accepted full cash payments for the properties they sold.  Actually, in many cases, the banks accepted far less than appraised cash values; thus helping to further reduce property values.

Even with the cash buyers the available housing properties were in the many hundreds.  The syndicates that bought them took over just a fraction of what was available.  What happened?

Currently and for a considerable period of time the major purchaser of real estate in the United States has been the Federal Reserve; they are and have been spending forty-five billion dollars a month purchasing distressed housing which the banks originally sold in bundles after breaking up each mortgage into one hundred to a thousand parts.

Since the midterm Election of 2010 the extreme end of the Republican Party has been in control of The House of Representatives and has passed no bill to aid the housing dilemma or to increase employment.  The Republican minority in the Senate has been able to filibuster anything it didn’t like, particularly bills that had to do with job creation and housing.  There has been no fiscal policy, the Federal Government spending money to upgrade the economy.

The only way possible for money to be added to the economic flow of cash in the nation has been through the Federal Reserve’s use of Monetary Policy.  Under the chairmanship of Dr. Ben Bernanke there have been extremely imaginative uses of Monetary Policy.  The Fed is and has been spending $85 billion a month on Monetary Policy.  Forty billion dollars is being used to repurchase government debt and forty-five billion dollars is going to buy real estate paper.

In essence they are adding $40 billion each month to the National Cash Flow and reducing by $45 billion the number of properties available.  This has allowed for both a slow economic growth and enough of a shortage of houses to allow for new construction throughout the country.

The result of this is phenomenal in slowly bringing about a number of economic solutions.  First off, the banking mortgage debacle created a situation where no one really owned the majority of the houses that defaulted on their loans.  The individual mortgages had been divided into multitudinous pieces where no mortgage owner has more than a very small fraction of ownership in the property and the records kept of these dealings where unbelievably sloppy.  There was no one to legally foreclose on anything.  In point of fact it will take a decade or two to sort this out.  These are the properties upon which the banks were foreclosing.  They did this by computer generating documents that the courts, for a while, assumed to be sacrosanct.  The Fed, by gradually buying up all these mortgages, can sort them slowly, as they get them, putting the pieces together.

The purchase of the real estate paper allows the Fed to do a number of things.  As we’ve seen above it can sort the mortgages and eventually define ownership on these bundled houses.  In the process it has and continues to create a shortage of properties and restart housing construction throughout the country.

Because of the need for more money in the National Cash Flow the FED will not foreclose on any of these properties.  Many of them are not only underwater they are at the bottom of the ocean.  By 2008, before the Crash, many banks were refinancing mortgages at 125 percent of their appraised value.  A large number of these foreclosed properties dropped to half or less of their pre-crash value.

The recipients of these properties pay full taxes on their incomes; they cannot deduct for the interest they do not pay.  The governments, state and Federal, are receiving at least 25% of the money that would have been deducted in interest payments as taxes.  This is adding billions to the National Cash Flow.  It is, as we’ve seen creating a shortage in national housing.  In a period of four to five years the Federal Government is more than getting its investment back in financial benefits for the entire economy.  The Government will eventually be getting back far more than the $45 billion it is spending every month.

Once the bundles are sorted out and the government has full ownership of these properties they will not foreclose because that would take money out of the economy.  The people will live in these properties until they decide to leave or pass on.  Then the property will revert to the government being worth, at that time, far more than they are at present.  Then also the housing debacle will no longer exist.

The Federal government, working through Monetary Policy in order to grow the economy, is bringing about the current housing situation in the United States. It, as we’ve seen, a new creative use of Monetary policy, which has never been done before, and it will effectively solve the bank-created housing dilemma.

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