MucheDumbre

There seems to be two camps in the economic collapse. Those that blame it all on the sub-primer and  those that blame it on the banks. Oddly enough, where you lay your blame usually depends on which party  you are affiliated with..

The biggest naivety I see out there is the notion that because someone on the street bought more than they could afford they influenced the likes of Bear Stern, AIG, Merrill Lynch and other like them into selling the sub-primer the loan. If a sub-primer had  that much influence over these companies who have been a staple on Wall Street for a couple generations now, then maybe we should let the sub-primer borrower run the companies.

I’m going to try and explain how the sub-prime fiasco came about and in the process I hope to show that while you can blame the little guy for his single part in the billions that were lost, you cannot blame him for the loss of the entire billions.

One day Joe decided he wanted to buy a $50,000 house. He was tired of living in his rental, he wanted to paint his walls blue instead of white, he was ready for the American Dream, so he calls a mortgage broker. The broker says

“Joe, I can get you into a $300K house for cheaper than I can get you into the $50k house, your payments on the $300k will only be $400 a month,  but on the $50K they’ll be $500 a month”

Joe isn’t quite sure why that is, so he asks the person who is the specialist. The same way if he were in the hospital he would ask the doctor to explain the procedure he wanted to preform.

The broker says to Joe,

“Well, if we do a soft money loan, ya know a conventional loan, you usually wind up paying 10% of the cost of the home and that’s the way we would go on the $50k house. But, if we go for the $300k house we can use ‘hard money‘ through a private bank, it’s a no money down, no-qualifying loan you’ll pay a low interest rate for the 1st 3 years and after that the value of your home will double and you can Re-finance into a conventional loan before that balloon payment starts.”

Now Joe is a little wary, because he knows that he doesn’t make enough money to pay for a $300,000 house. At the same time he trusts what he is being told by the specialist. This isn’t a used car salesman he’s talking to, this is banker and when Joe tells him that he doesn’t make enough money the broker tells him

“This is a no qualifying loan…that means no one is going to ask. On the other hand, if we go with the $50k house, we’re going to have to pull your credit,evaluate your scores,do a  thorough employment and tax background and your out of pocket expense is going to be about $10k”

You have to understand something, not too long ago, mortgage brokers were responsible for 80% of the mortgage-lending out there. Investment Banks were screaming for more ‘wads’ and the brokers were doing everything they could to get them. People were steered into these ‘hard money’ sub-prime loans. Once the banks  talked them into these loan they would charge them outrageous fees. They would get their money right up front because it would be attached to the mortgage so there was no ‘out of pocket’ for Joe. It would be your own little refund check which you would sign over to the mortgage broker. Conversely, if you did it the conventional way, you had to pay these fees up front and with your own money.

Once you went the ‘hard money’ way,  the broker would then bundle up 5 of these and tie a grade triple AAA+ loan on the front cover and sell the whole package as AAA+ to an investment bank and make even more money. These were called.. mortgage backed derivative securities.

Now, from this point on… you cannot blame  Joe the sub primer. He is but one single problem in that bundle that is being sold, he is an ‘eye’ on the hot potato going around the banking world.

So now the investment banker, in essence, just bought $100 bill wrapped around a bunch of paper that’s been cut to look like money and he knows it, but he also knows he can wrap 2 $100 bills around the same bundle and resell it to pension fund for triple what he paid. See this is a hot commodity right now, the entire world is dumping their money into these things, hell Iceland’s entire financial world was based on them. So the investment banker gathers up 500 bundles of these loans and sells them off to someone else for a massive profit.

Do see where this is going yet?  Since the investment banker is now selling 500 bundles at a time and selling them for record profits, they need, no they must have more of them! But most  mortgage brokers only have 5 bundles at a time to sell them so this frenzy this creates more brokers who are now competing with each other to get the investment banks money and now the brokers get even more lenient with innocent people looking to buy a home. They also started branching out to Realtor and start hooking people who are looking to rent a home and have the Realtors steer them to the mortgage broker to buy a house for cheaper than you can rent. And this goes on unchecked for a few years. It’s not that no one knew what was going on, but as long as you weren’t the one stuck without a chair when the music stopped why would you care?

One day a pension fund is going over it’s books to check it’s bottom line. They’ve assessed the value of their bundles that they’ve been buying from the investment company at $1 million. Well, because they thought their worth was $1 million  they went out and bought a million dollars worth of stuff on credit and now the payment is due so they’re going through their bank records to find the cash that these bundles should have been paying them all this time. See they need the cash to pay their loans. Well, lo and behold what do they find?  Not only do they have a $100 bill wrapped around a bundle of worthless paper, but now that these bundles are getting to the their ‘balloon’ payments time and they are defaulting right and left, that $1 million the pension fund thought they had in profit is really a $1 million unsaleable debt…and now their  not just fuck, but proper fucked because they can’t make their own loan payments.

It was shell game, a massive ponzi scheme, a con-job played on a global level, an yet there are people in the upper echelon blaming the guy playing it instead of the guy running it. Why are they blaming him? Because he is the one who should have known better.

To use the medical metaphor again, they’re blaming the patient for listening to the doctor’s advice on a procedure because the patient should have known better.

No one can tell me that had they been in Joe’s shoes they would have chosen to go with the $10K out of pocket expense + higher monthly payment when the bank manager is telling them that the better deal is the no out off pocket, lower monthly rate and maybe if we get a good appraiser *wink* we’ll get you a HELOC for 40% of the home value for you to do with as you please.We can all feign piousness as much as we’d like, but deep down we know we’d take that risk also.

It was a combination of deregulation and greed which caused systematic failure and corruption, partnered with the corrupt appraisers, servicing companies,title agencies, JP Morgans how to cheat memo and  Joe who does have some blame. Joe was not the beginning,middle and end of the problem though, but like I said in the beginning, where you lay your blame usually depends on which party  you belong to. The party that blames Joe should hope he never finds out that they believe him to have this kind of control over the global economy. He might just think he’s capable of ending the conflict in the Middle east or something. Then again, they are consulting him on how to fix the economy.

Yeah, we’re proper fucked.

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