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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I had a very interesting conversation with my Tony Soprano mortgage company the other day. With the layoff and the client list dwindling, I’m paying about 65% of my income to my mortgage. Yeah I know, which is why I’ve been keeping up with all the socialistic mortgage aid programs. Think what you want about me but I’m not afriad to admit when I’m wrong or ask for help when I need it.

So the phone call when something like…

“Hello Mr. Soprano, this is EeKay Gee, how are you today?”

“Well Mrs. Gee, if you would stay on time with your payments I would be better.”

“That is exactly why I called…. I believe I have a solution to both of our problems.. I found a program that goes into effect on December 15, the plan is a basically a loan modification. These are already in existance for hardships, but this is a streamlined version that gets the process started and over with in a matter of minutes.”

A loan Modification can be for many purposes, but basically what they are is the borrower asking the lender for either some plan to repay their past arrearages over time, a reduction in the price that they pay or a payment deferment for X amount of time.

In order to get approved for a loan modification the borrow has to jump through many hoops like a

Image by Lori Spindler via Flickr

good little poodle. There is a hardship letter explaining why you want a loan modification and what you would like that modification to be. Past years tax returns,full financial statements including 401k,retirements,annuities,insurance benefits,bank statements,letters from your boss,medical records, stock and bond statements,pay stubs,disability,unemplyment-retirement and/or Social Security benfits you have applied for… and finally a credit check.

Because anyone asking for a loan modification is sure to have steller credit.

The new streamline approach forgives all of that and asks for 3 simple things,

• that you are able to pay no more than 38% of your income
• that you certify your gross monthly wages
• that you haven’t filed for bankruptcy

easy peasey-pudding pie.

Image via Wikipedia

“You see Mr. Soprano, this new system makes it all so much faster and easier.”

“Yeah, but Mrs. Gee this is for Fannie,Freddie and Indymac mortgages only.. By the way,Big Pussy will be stopping by your house later tonight.”

“Mr. Soprano, I’d love to have Pussy for dinner, but while this plan is only mandated for Fredddie,Fannie and IndyMac, many other major lenders are following the same plan. The FDIC is recommending all lenders, including private ones such as yourself, follow the plan.”

The plan is not only easy-peasy in it’s application, it’s simple in it’s problem solving abilities. The lender will rework the loan to make sure the borrower is not paying anymore than 38% of their income, there are various way to do this, as this .pdf explains. Lowering the interest rates and extending the term of the mortgage are just a couple of options. The idea is to keep people in their homes at a payment they can afford and keep the mortgage company from losing more and more money when borrowers default.Which leave their homes vacant and all the unsold homes bringing the market down even farther.

“Mr. Soparno, if you would lower my interest rate from 13% to 6 percent for 5 years and then raise that interest 1% a year until it reaches the Freddie Mortgage Survey Rate you would still be making money off the money you loaned me and I would be able to stay in my home”

“Let me get this straight, you want me to reduce the money I”m going to make so you don’t have to pay me back for something that you promised to pay back?”

“Yes.”

“I’ll give this, you have balls. But Mrs Gee, we don’t give free stuff to people in this country and you … “

“I’m not getting anything for free though, I’m getting something at a 6% interest rate for 5 years and then an increase of 1% until it matches the prime mortgage rate, that’s extra money for you off of your investment. I know this is non-tradional, but the biggie lenders are seeking out and cold calling their borrrowers and offering this to them in an effort to keep people paying on their loans and not defaulting on them. JP Morgan, Citigroup and WellsFargo all are using the program voluntarily. Which the FDIC hopes that all lenders will follow.”

“Mrs Gee, this program doesn’t benefit me in any way so why would I offer it to you?”

“But it does Mr. Soprano. I will be paying you back on your loan instead of not paying you anything and that is a benefit to you.”

“No, a benefit is when I get something out of what I put in, why would I reduce the interest rate to such a small level when I can make double that leaving it what it is now?”

“Mr. Soprano, you won’t be making double anything if I default on this mortgage, with this plan you will atleast get your investment back plus 6%.”

“Yeah, but I want 13%.”

“..and I want wishes to flow from my ass like raindrops, but I’m willing to let that dream go if I….”

“What did you just say?”

“nothing….”

“That’s what I thought. Look Mrs. G, as I said, this plan isn’t for your type of loan, I will send you the loan modification papers that we have always used and you get me everything on the requirement list, if you don’t have something, write a note explaining why you don’t have it and then take it to a notary and get the note notarized. Do this for each individual item, you can’t just make a blanket note covering all the things on one paper. After we receive this paper work from you, we will pull your credit report and if your credit is above average, we will go from there.”

“You would rather get nothing than get something.. “

“That’s the gist of it, yes.”

“Can I ask why”

“Because I do not believe anyone should get a free ride, I worked hard to get where I am at and if I can do it anyone can. If I reduce your interest rate I will be losing 7 points and I am not in the buisness to lose money, a 6% return is not good enough when a year ago I was getting 13%.”

“..and 6% will seem like a butt-load of money when you are getting zero.”

“Oh, I will be getting something..I will get your house.”

“Not right now you won’t. Now you’ll force me to file bankrupcty and while we are dragging that process out for 6-9 months you won’t be getting anything, and when congress approves the plan to allow bankrupcty judges to re-work mortgages into the FDIC plan, I will start paying you back your money with a 6% return on your investment”

“That won’t happen, you forget I have more money to spend on lawyers than you do..Pussy will be there to collect my return shortly”

He’s right of course, it was my responsibility to repay him the money he loaned me at the rate he charged. I have done that each and every month but now, through no fault of my own, I can’t keep paying 65% of my income out to one creditor. To give me and the millions of others like me this plan is not giving us scumbags something for nothing. It’s just smart buisness. According the Joint Economic Committee of Congress, the average foreclosure costs $77,935 while preventing a foreclosure runs $3,300.

When the best interest for all is to take a little less than you hoped to get.. isn’t something better than nothing? Especially when to do so cost pennies that can be put back on to the borrow compared to tens of thousands that can’t be put onto to anyone other than the lender.

I guess not…

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