Monday, February 23, 2009

Mortgage Meltdown -- Housing Inflation - Immigration

I've brought up some thoughts and data in postings here linking the causes of the
mortgage-meltdown to excessive immigration. Our government is in complete immigration denial and the two topics, housing and immigration, are never uttered in the same breath.

Raising the stakes in the financial debate would be the linking of mass-immigration to housing inflation and the ensuing mortgage meltdown. Linking these topics is not a hard thing to do. The final stages of desperation, is the importation of highly skilled labor -- the H-1B and L-1 visa -- these are mercenary workers who are most likely to displace a wage-earner with a performing mortgage.

The first step for curing the disease of mass-immigration is admitting you have a problem. In the decades leading up to the Great Depression, the economy was also "shocked" with mass-immigration.

Pre Great Depression Immigration rates:
1821-1830 143,439 immigrants arrive.
1831-1840 599,125 immigrants arrive.
1841-1850 1,713,251 immigrants arrive.
1851-1860 2,598,214 immigrants arrive.
1861-1870 2,314,825 immigrants arrive.
1871-1880 2,812,191 immigrants arrive.
1881-1890 5,246,613 immigrants arrive.
1891-1900 3,687,564 immigrants arrive.

Pre 1900 Total 19,115,132 (80 years)

1901-1910 8,795,386 immigrants arrive.
1911-1920 5,735,811 immigrants arrive.
1921-1930 4,107,209 immigrants arrive.
1931-1940 532,431 immigrants arrive.

Post 1900 Total 19,170,840 (40 years)

To illustrate how important housing is to the economy, home ownership rates declined only 4.2% during the Great Depression (47.8% in 1930, to 43.6% in 1940).

Currently, home ownership rates have already declined 1.7% in 4 years, (69.2% 4th Qtr. 2004, to 67.5% in the 4th Qtr. 2008).

Next we look at the housing availability in recent times.

Percent Change in House Prices Period Ended June 30, 2007
(United States) Since 1980 = 309.4%

Then, we have the tiny Rental Housing growth compared to growth in the labor force.
1993 through 2007

Growth Rental Housing (Occupied Plus Vacant for rent) = 1,002,000
BLS Growth Civ NonInstitutionalized Labor Force (16 and over) = 39,372,000

Our immigration policy has tried to cram 39 people (immigrants and our children) into each new rental housing unit in 15 a year period -- it is no wonder the housing market hyper-inflated. The flattening of wages and the ever declining population of wage-earners who could qualify for a traditional Prime mortgage caused the banking industry to create EZ and No-Doc loans out of self-preservation -- these mortgages were repackages and sold to unsuspecting foreigners -- they didn't become toxic assets, they were always toxic, the banks refused to hold them.

Housing data from Harvard displays the decline of the qualified mortgage customers.

Data from: Table A-1. Income and Housing Costs, US Totals: 1975-2007
In 2007 Dollars.

Increase Home Owner income = 13%
Increase in Home Price = 74%

Even with lower interest rates, the after tax mortgage payment is 49% higher than 1975.

Increase in renter income = (-3%)
Increase in Renter cost gross rent = 10%

The solution:

The key is to present a solution that make financial sense, especially to banks and investors, taking into account ALL of the causes of the problem.

First, control immigration and reduce the numbers of new immigrants until "dryfoot" illegal immigrants and guest-workers can be investigated and brought into some sort of naturalized status -- frauds and criminals deported. The honorable migrants already have jobs and housing and cannot damage the economy as much as newly arriving immigrants who shock the economy with wage declines.

Second, "Nationalism" of banks and creation of a "Bad Bank" to hold toxic assets are both incorrect terminology. In the Insurance Industry, a temporary "nationalization" is called a Conservation and the "Bad Bank" is called a Trust.

The so called Toxic Assets have not matured yet, even if though some are in default. MBS and CDO investments are largely long term investments and the capital is only lost when the asset is liquidated in a foreclosure sale.

If we are to allow a Conservation of these MBS/CDO investments, to conserve the paper value of the capital investment, we need time for the assets to recover in value. Nationalization and bailouts are undesirable. A Conservation is a favor to the investor and the banker, the rules are suspended to preserve the paper capital, but in return for this favor they must agree to our terms. The alternative is that we can simply allow Mark to Market rules devalue the paper value of the capital investment.

The liquidity problem is the absence of the circulation of currency, with this in mind, mortgage workouts and cramdowns should be negotiated to the traditional 30% income level. Lender who wish to remain predatory mortgage providers should be punished, unprotected in the open market. In the case that the house is foreclosed, and standing empty, it must be introduced into the rental housing market to generate dividends for the MBS/CDO investor and property taxes paid. The homes must be occupied and productive to be included in the Conservation.

The circulation of currency is the key to our fractional reserve banking system, we must somehow generate currency flow in order to put the 1 to 9 leveraged lending rations back to work.

There were 35,147,000 renters in the U.S. in 2007. Flooding the rental housing market with currently vacant homes would reduce the housing costs of renters. A $200.00 savings in rental cost per renter would inject $7,029,400,000.00 per month of disposable income into the consumer markets without a wage increase. Some of the $7 billion monthly would circulate through the banks and improve lending reserves at the $1 to $9 fractional reserve leveraged rate. Theoretically, this $7 billion could be leveraged to $63 billion per month.

Similarly, cramdowns will also generate billions of dollars in disposable income and stimulate our fractional reserve lending system by the circulation of currency. Stable housing costs will stabilize labor costs -- the temptation to move overseas will be reduced -- keeping housing costs affordable in the U.S. is the key to global competitiveness.

Final note:
I suspect that both the immigration oversubscription and the property valuation problem will take about a decade to recover. The MBS/CDO investors are going to have to be patient if they want to preserve their capital. If we publicly provide a comprehensive solution that addresses immigration, I think they will be patient.

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