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I'm going to start today's Ticker with something I've touched on but a Bloomberg article yesterday poked at the scab and made it bleed again - military members caught up in the foreclosure mess:

"In the midst of the worst surge in mortgage defaults in seven decades, foreclosures in U.S. towns where soldiers live are increasing at a pace almost four times the national average, according to data compiled by research firm RealtyTrac Inc. in Irvine, California. As military families like the VerSteeghs signed up for the initial lower rates and easier terms of subprime mortgages, the number of people taking out Veterans Administration loans fell to the lowest in at least 12 years."

Alright, I'm going to dissect this piece by piece, and probably gore everyone's Ox, including the brass - that is, commanding officers and above.

First, background - I live in an area with a very dense military, both active and retired, population. There are four major military installations within an hour's drive of my home; Eglin, Hurlburt, Pensacola NAS and Tyndall. Many military individuals and families, along with civil-service folks attached to the bases, are very close personal friends of mine. I, however, have not served, and I will not make excuses for it - when I was young enough to do so I was not disciplined enough to volunteer. So there you have it.

Now let's talk reality. Active-duty military members are typically "PCS'd" (that is, "permanent change of station") once every two years. That is, you are typically reassigned to a different location on a permanent basis every 24 calendar months. Of course with the War On Terror going, you could be deployed at any point in time, but that doesn't change your station and where your family, if you have one, resides - but a PCS order does.

Now let's think. The commonly understand rule for buying real estate is that you must be prepared to live in the home for five years to have a reasonable chance of recovering all of your costs and expenses on both sides of the transaction.

This is simple mathematics - the typical real estate commission is 6% on each side - that is, 12% for a "round trip". The typical and sustainable long-term home price appreciation is in the 3-4% a year range, exactly in line with salaries. You also have other transaction costs associated with buying and selling a home, such as deed stamps, title insurance and various other fees and expenses (e.g. mortgage doc stamps in some jurisdictions, etc)

It is quite clear that if you buy and sell a house every two years you are likely to lose very significant amounts of money.

In fact the only way you can profit from that transaction is if housing is in a bubble and appreciating very rapidly.

Further, anyone in the armed forces must expect to be PCS'd every two years - even if you aren't, that's the "base case" expectation.

So what are military families doing buying - instead of renting - in the first place?

I can see it if the member of the family is on his or her last tour and is not going to "re-up", intending to settle wherever their last location might be. That makes sense. But if you're in and staying, tell me how it does?

Ok, that's part 1. And guess what - I bet the military does a piss-poor job of educating people as to the financial realities that are associated with this.

But part 2 is where I get really angry, because lack of knowledge is one thing, but intentional exploitation is another. And when it comes to the Realtors and Mortgage Brokers involved in this "trade", they know good and damn well what I wrote above.

They are professionals in the housing industry and in my opinion have an absolute duty to inform service members that this sort of transaction is highly speculative and fraught with risk. I can tell you with absolute certainty from my conversations with service men and women in this area that they did not and do not.

Furthermore, what is this subprime over representation among people in the service? There is already a program for servicemen and women to buy homes, its called "VA", and it features zero down payment provisions, no mortgage insurance requirements and no piggybacks or games such as prepayment penalties. Furthermore, most VA loans are assumable, which means that when you go to sell your house, provided the buyer meets eligibility requirements they can assume your mortgage instead of getting a new one! This is a MAJOR feature in that virtually NO ordinary mortgages can be assumed.

This is the program that veterans and active duty service folks should be using!

So how come there are so many subprime mortgages held by active-duty servicepeople and why did VA loan volume fall to the lowest level in 12 years?

Good question. Laziness? Ability to play games like cash-back at closing? Fees? Who knows. What is known is that the VA loan volume went off a cliff, and obviously, it wasn't in the best interest of the buyers (or the ramp job in foreclosures wouldn't be happening.)

In short servicemen and women were in many cases railroaded.

Now to be fair, not all servicemen and women were jacked around - in some cases they jacked themselves, or simply got greedy and decided to try to play "house roulette."

Some of the stories that I've seen in the media are simply not believable.