Market participants know about the rule. When there's a big writedown of illiquid assets, they are sophisticated enough to know that those same assets are very likely to be written back up once the crisis passes. In other words, they discount the changes in both directions accordingly.

On balance, M2M is a big boost to transparency, which is the fundamental requirement for markets to function.

The stock market makes a miserable secondary market for mortgages. Not only did it make life miserable for borrowers when it did work (ever had your Lender change five times on you in a year?) - it destroyed our entire industry when it didn't work.

The truth (that you will never see in print) is that the construction of mortgage Notes are far too usurious; we would be better off without a secondary market altogether; let local banks write the loans and hold the loans; make it illegal to sell mortgages and make it a local market that returns capital to the town / city where the houses exist. Why should the mortgage on my house be serviced by a bank out of Shanghai? Why should a bond be traded as a security on the stock market?

See anyone standing up and calling the whole system stupid? Nope. See anyone in government who really cares about the homeowner? Nope. Why on earth did they build such a twisted over sized market for mortgages? No one cared what was best for the homeowner, all they cared was how to make more money off the homeowner.

Daysman:

The stock market makes a miserable secondary market for mortgages.

Mortgages aren't traded on the stock market.

Daysman:

The truth (that you will never see in print) is that the construction of mortgage Notes are far too usurious;

Defend this.

Daysman:

we would be better off without a secondary market altogether;

Secondary markets exist to attract additional capital to finance mortgages, i.e., they lower interest rates.

Daysman:

let local banks write the loans and hold the loans;

The reason they don't is that they can't compete. I.e., they charge higher rates.

Daysman:

Why should the mortgage on my house be serviced by a bank out of Shanghai?

Because the Shanghai guys charge less.

Daysman:

Why should a bond be traded as a security on the stock market?

Because it lowers interest rates, and because more people can get mortgages.

Daysman:

See anyone standing up and calling the whole system stupid?

Everywhere.

Daysman:

See anyone in government who really cares about the homeowner?

I don't see many in government who care about anything except keeping their jobs.

the secondary market does provide a lower interest rate; as it is a larger market... but if we changed the laws and made home mortgages use simple interest like car loans... the Notes would carry so much less interest than now, even if they charged 50% in the local banks (the compound interest rate of 7% will generate around 120% over 30 years).

There are other dire consequences from the compound interest charged home mortgages. This huge interest influx into our money markets is a primary cause of the money expansion that pushes home prices through the roof (great pun) and creates such over sized payments in the first place.

Things like simple interest would cause the money spigot to turn off. So would Hillary's incredibly stupid idea about freezing interest rates. Loans aren't just about borrowers. If lenders don't like what they see, they'll exit the market.

but if you bought the loans at the federal level and left the servicing of the loans at the local level; and paid out a service fee with the profits... Lenders would go for that a lot quicker than this current mess, which by the way, has slaughtered 75% of the national Lenders.

"Lenders" being the bank that tables the loan... just so you don't think I'm referring to the secondary market with that 75% figure.

They don't have that much capital. The mortgage market is gigantic...

It used to work; and homeownership, as a percentage of the populace, has changed little since then. Also, I don't think that, when looked at over a decade or two, the inflation in home prices has differed much from the inflation of other things - including wages. There must be something mysterious at work here.

they don't have to go through the Federal Reserve. The FHA underwrites a ton of housing based on that issue; why couldn't they just as easily fund the loans? Rather than insure the loans, which costs the homeowner even more money, they could buy the bonds the same way the FED is doing right now. Then the local banks could offer rates at local market conditions, and start making money in this business (they haven't for decades) and rebuild the Lender vacuum.

Local banks would grow, homeowners would get better loans, business would start booming again - which would turn around the housing slump, and huge Wall Street banks would lose a market segment they had no business biting into. The old GSE's would disappear and good riddance; they were entirely corrupt and mainly to blame for this housing disaster to begin with. Most of all, the economy would take off like a rocket and the dollar would recover at the same time.

As long as the mortgage market was clearly seperated by laws, it wouldn't hurt the FED; they didn't used to deal with this stuff anyway; I think the reason they got burned so bad was because they went into a new market thinking it was safe just when the GSE's were kicking out junk. The truth is even uglier than that; first the FED arranged to divert half the housing market from the GSE's to Wall Street by strong arm regulation tactics. The GSE's retaliated by relaxing guidelines which were the infrastructure of the industry. So the GSE's created the poison kool aid to feed to the whole industry; it stopped Wall Street's appetite for mortgages, but it also killed the giant Lenders... and they were all corrupt as the GSE's and always have been. When all said and done; no one on Wall Street wants to buy mortgages anymore, anyway, so let's take it away from them and build something smart.

But they've never been the whole story.

You want massive inflation, try this. The Treasury borrows money, it doesn't create it.

OK, so the Treasury doesn't create money; it creates Treasury bonds. The Fed creates money. Then, they swap the bonds for the money. Everybody is now happy because the books balance: fiat bonds for fiat dollars. Go figure!

The Treasury can create money and has created money; how do you think Lincoln financed the Civil War? Remember the greenbacks? (he also sold bonds, but he sure as hell did print a ton of money)

As for Larry's charge that this would create massive inflation; WRONG! just the opposite; I am talking about replacing existing mortgages that have massive interest with new mortgages that have far less interest... that would reduce inflation.

Cutting interest rates would help homeowners (until prices rose to reflect those changes), but inflation is caused by mismanaging the money supply, which "printing dollars" would do in a big way.

When Lincoln printed up all that new money to fight the Civil War, it caused a ton of inflation; making the greenbacks infamous for the debasement that accompanied their inflation.

But that's not the same action that takes place in refinancing a mortgage. When you write the new Note, you fold the old Note. There is no new money being created. If the new Notes are less usurious than the old Notes, there is less inflation pressure on the overall market.

As for new business, heck, that's all the better; let's start writing loans that stop sending 90% of their payments to interest. Once again, it would be a lot less inflation than the Notes we are writing through the current system. I spelled this out in more detail, over on the Fixing it board, in a reply to Arlington....

Arlington,

Let's take three steps back (which would give us two more steps than Gross took before he wrote this article) and look at the whole game of over inflating the money supply and then reconciling high interest mortgage Notes with income tax deductions.... doesn't that just build a model based on inflation? The income tax is used as a tool to balance the interest... not as an income tax (you know, to provide a fair and balanced tax on the personal income for a fair and balanced support of govt by each citizen; ala, the way they sold it to the farmers when they first passed the amendment)

At what point do we finally wake up and smell the interest? Look at your average mortgage payment; what percentage of that is going to "interest"? That's the percentage of housing finance that is inflating the dollar... we are destroying ourselves with our own payments!

It's time to blow the whistle on the construction of the mortgage Note; it is and always has been illegal to charge interest in advance, so let's stop allowing the banks to do that via the "fixed" method of building these Notes. There is over 100% interest rolled up into these Notes in advance of a single day on loan.

Placing a cap on mortgage interest is still a regional inequity; freditor05 might not know what he's saying but he does have a point (if you babble long enough, anything could happen) and yet this whole system of hyper inflation via amortized compound interest is cutting our own throats; the banks do not benefit in the long run because the creation of all this new money is what caused the credit crunch, and the economy is being drained, and homeowners are constantly facing rising prices the same as gasoline and other commodities; all due to the falling dollar which is falling in the first place because of the hyper inflation caused, in no small part, by our compound interest mortgage Notes.

Let's change the system. To hell with these GSE's (privately owned super banks set up by the govt to make Wall Street the master of our mortgages as well as our industry) - our govt set them up and our govt can cut their purse strings. Let's set up fair financing via funding through the FHA. We could simply print money the old fashioned way... directly from the Treasury. That way, not only is there no bond (hence no debt) but the currently worthless Treasury could actually turn back into a place where money resides again. Table the money directly through local Lenders and pay a portion of the simple interest back to the banks as payment for servicing the loan. The dollar stops going to hell, cuz this takes the hyper interest out of 40% of the nation's debt, the local banks start to grow with all the new business; the housing slump turns around with readily available loans for existing home sales, and finally, the economy will pick up gangbusters from all this new activity. What do we lose? The GSE's. And what do they do? for the economy? nothing at all. Giant parasites is all they ever were.