Livinglies's Weblog

Most stories about the mortgage crisis begin with the idea that people were induced to buy homes they could not afford. This is mostly incorrect. The reason for the meltdown is that people were induced to “buy” mortgages they could not afford — when in fact they qualified for mortgages they could afford and would still be paying but for the deceit of mortgage brokers and even real estate brokers who were skimming from the transaction.  The lenders and investment bankers who are claiming “plausible deniability” on this are not telling the truth. We know that because they paid the kickback either directly or by financing it.   This is not a story about buyers who went into a frenzy buying things they couldn’t afford.This is largely a story of conversion of equity of innocent people into fees for well-heeld, well connected scam artists — i.e., the transfer of wealth from those who have money and whose intent to buy something they could in fact afford, was switched into a scheme to take away their money, convert it to fees, take away their houses and all the improvements they made on those houses, and take away the savings of investors who were duped into buying shares in managed funds and institutions that were buying “high rated” CDO’s. On the buying end of the game, here is how it works.

1.  Joe Jones and his wife Mary go house shopping. They are well-employed, with reliable jobs, and good credit ratings. They have a well-analyzed budget as to what they can afford and what they can’t but hey lack one thing — sophistication in financial instruments and legal knowledge of complex mortgages. This presented an opportunity to the scam artists out there who are claiming protection under the law, because they say what they did was legal. It wasn’t and it isn’t. They lied, took money for lying, and intentionally used their position of trust for their own benefit instead of delivering the services and Joe and Mary thought they were hiring when they went to a mortgage broker.
2. The real estate broker steers them to a mortgage broker that (a) will assure that the deal closes because they will do anything to get the borrowers to sign papers that misrepresent their financial position and that misrepresent the value of the home and (b) more importantly, will give the real estate broker a kickback for the referral because the mortgage broker is about to pick up a huge fee called a “yield spread premium.”
3. The Mortgage broker is presented in one of two alternatives in this market: (a) give the customer the best mortgage they qualify for and collect a reasonable fee or (b) convince the customer to take a mortgage that appears cheaper but is in fact much more expensive, for which the mortgage broker will get a kickback representing a fee which is a percentage of the the difference between the value of the mortgage the customer should have received and the higher value of the mortgage they were convinced into signing. If the mortgage broker goes for the the dishonest option, he/she might earn as much as $10,000 EXTRA. 
4. Since the application process is both complex and expensive in time and money the customer is not free to shop around as one might think from the advertisements. And the nuances of one mortgage proposal versus another, are not clear except to experts who conceived them — people who knew they were going to transfer the risk to investors up stream. Thus none of the downstream participants — the “lender”, the “underwriter,” the “appraiser,” the real estate broker, the title company, the lawyers, the mortgage broker or the seller/developer have any interest in keeping the transaction honest because they are all going to make money whether the deal fails or not. The risk is going to Wall Street where it is being parceled out in “derivative securities” in nothing less that clear securities fraud on MANY levels. 
5. Thus we have fraud going on at both ends of the line — starting at the home purchase and ending with the securities purchase. The amazing part of this is that while they were all committing fraud with full knowledge of the damage to the buyers and securities investors, the giddy greed factor became so great that even the scam operators themselves took positions in the CDO’s (which might as well be called junk bonds or junk securities) so that they could sell them at a premium to multiply the fees they were earning from this scheme into capital gains many times the fees they were “earning.”
6. So Joe and Mary can afford a mortgage where the total payments are $2350 per month but are steered into a mortgage where the payments appear to be lower. The deal is “explained” to them until their minds are numb with too much information and too little understanding. They listen to their mortgage broker who after all is the person they hired to advise them and who clearly does understand the complexities of these obscure documents and instruments of conveyance. 
7. Joe and Mary are also encouraged to put down less money than they can afford because that makes the mortgage debt higher and increases the bonus kickback to the mortgage broker for converting them from a conventional mortgage that they can afford to a sub-prime mortgage (in sheep’s clothing) that they cannot afford. 
8. Now it is 2 years alter and Joe and Mary are in shock. Their income is stable, their credit rating is great, they have a great family and they have fixed up the new house nicely to their liking. But they have a growing problem. The 6% mortgage they could afford for a conventional mortgage was never presented. They could have paid that off easily. Instead they have a sub-prime, negative amortization mortgage, adjustable in its rates and they are now up to 11% with payments more than twice what their budget will allow them to pay. 
9. So Joe and Mary are either not making payments, offering partial payments that are being rejected by a mortgage service provider who does not have the authority to adjust anything, or about to stop making payments. They are considering bankruptcy to save them but there while relief might be available, all of their payments under a Chapter 13 plan, are subject to an additional 10% fee for the bankruptcy trustee to process it. So in fact they are facing worse trouble if they go that route.
10. In short, they are screwed and nobody cares.
11. But here is what ought to happen:
    1. They should get legal help because all sorts of laws were violated — including truth in lending, breach of contract with the mortgage broker, and fraud — civil if not criminal. 
    2. Lawyers should step up tot he plate and take these cases on contingency, forcing the lenders and investors to settle the claims by giving the Jones family a mortgage they should have received in the first place and paying them damages for the fraud that was committed. Fees would be paid by the scam artists instead of the lenders.
    3. The Sheriff should convene his economic crimes unit to investigate and prosecute people for this fraud.
    4. The Sheriff should also call a moratorium on evictions.
    5. The State and Federal Attorney General should do the same and should join with the attorney generals of other states much the same as was done when Big Tobacco was taken on. 
    6. The state legislature should pass remedial legislation changing the procedures for foreclosure so that the victims have more time to get their defenses up.
    7. The Congress should do the same and initiate regulation of interstate lenders and the mortgage brokers that enter the transactions with felony penalties for violation of the duty to disclose.
    8. The Governor should issue an order stopping eviction on all foreclosures until there is a hearing before a judge where it is determined that there is not at least probably cause to believe that a fraud was committed. 
    9. Class action suits should be initiated against the mortgage banking, investment banking and retail securities firms that created this scheme, with full restitution, fines and loss of licenses — people should not be put out of their houses, Wall Street scammers should be put out of business.

Filed under: CDO, CORRUPTION, Eviction, foreclosure, Investor, politics, securities fraud | Tagged: CDO, fraud, meltdown, Mortgage, securities fraud, yield spread premium |