Mortgage Meltdown: Rules of Engagement

Mortgage Meltdown: Smoke and Mirrors Bailout

It is obvious that the “snooty” U.S. bankers, as the Europeans are openly referring to them, still think the world is stupid. The message is out. A massive fraud has ben perpetrated by creation of complex derivative securities that looked better than they were, were rated better than they were (bought and paid for ratings), the creation of funny money, and the apparent loosening of credit that was fictitious, as the many people who are now distressed borrowers can attest. 

The remedial action proposed is illusory just as the original loans and securitized CDOs were illusory. And the blessing they get from government and rating agencies is just a continuation of the cold, hard, calculating attempt to distract foreign government, local governments and investors all over the world from making a run on banks, investment bankers and clamoring for heads to roll.  

The current plan calls for a division of “qualified” borrowers into classes. The classes that are covered are people who (a) don’t need the help or (b) certain people who are not in default but who would otherwise qualify for a loan now. This leaves the vast majority hanging in the wind — millions of homeowners, millions of renters and tens of millions of people affected by the fraudulent issuance of CDO’s under false pretenses and misleading disclosure. That means government investment funds for cities, states and nations are in peril as well as managed funds and individual investors. 

Even the people who are in the class of “can pay no matter what” are in more peril than they think because of this debacle. They face risks of job loss, massive historical inflation, devaluation of the dollar, loss of pensions, loss of purchasing power from social security and governmental programs, investment losses from lower corporate earnings, decreased purchasing power from dividends denominated in U.S. dollars, higher taxes arising from decreasing revenues received by state and local government, medical emergencies where they find out that the coverage they thought they had is not as broad as they were told, increased sales taxes, and business, investment and property losses from storms aggravated by global climate change, where the insurance companies have either already pulled out or have inserted exceptions that will allow them to either reject claims or settle for pennies on the dollar. 

And then you have the renters who are not even included. They are being tossed out of homes where they are current in their payments but the house is foreclosed. Rents are rising and the number of homeless people and the economic status of homeless people is likely to change demographically in ways that will stun the American citizen.

Completely ignored is the issue of lender liability, securities fraud liability, and a host of anti-trust, FCC, and other violations entitling plaintiffs to recover not only compensatory damages but punitive, treble or exemplary damages. As stated by many central bankers around the world, everyone has a dog in this catastrophe. 

Here are the basic rules of engagement that should apply:

 

  1. All classes or borrowers and homeowners should be included, except those who can’t afford to maintain the property. This will take the heat off everyone even if there are reduced interest payments or deferred payments by extensions of maturity dates. 
  2. Any and every plan should allow for at least 7-10 years for correction of problems that were created.
  3. Disgorgement of profits and equity by investment bankers and other parties who sold the CDOs should be part of every plan relating to every class of investor and borrower.
  4. Focus not only on those who are subject to ARM resets in 2008, but also on those who have already been reset one or more times. A tiered approach would salvage consumer purchasing power and lead to a softer landing for the recession we all know will happen.
  5. Start with the premise that anyone who can afford to maintain this home, even without paying anything on the mortgage in the first phase, should be allowed to do so at least for a short while. 
  6. Focus on plans that allow some return to investors in the CDOs, even if those are reduced from what was expected. 
  7. Remedial federal, state and local legislation requiring cooperation of all parties is protected against the ex post facto prohibition in the constitution under public policy, extreme hardship, and protection of the security of the public from economic disaster and social unrest arising from the dislocation of millions of people from their homes. Change the bankruptcy laws where necessary to protect borrowers from the obvious abuse of power that was leveraged against them. Cap credit card rates, and start reducing them. At the moment they are robbing the economy of vital consumer spending dollars that would benefit the economy as a whole. 
  8. Allow developers, lenders, mortgage service providers etc to participate and get protection but reduce fees for mortgage service.
  9. Prosecute high profile offenders  under securities laws, fair trade laws, truth in lending laws, etc.  Real estate brokers and mortgage brokers who steered people into teaser rate mortgages when they otherwise qualified for better, more secure loans should be required to disgorge their fees. Investment bankers who are a the source of yield spread premiums should finance the disgorgement.
  10. Apply disgorgement of fees and excess profits and damages to both borrowers and investors.
  11. Establish a moratorium on all tenant evictions where the tenant is less than two months in arrears. 
  12. Establish short term rent control to allow people to get on their feet, provided the landlord is not taking an actual loss. 
  13. Cease issuance of extra currency and liquidity into the marketplace as soon as practicable. Every dollar issued, every bond sold represents a potential to come back as five dollars worth of inflation on the U.S. economy. 
  14. Establish a specialized division of the SEC to analyze exotic securities and establish whether the disclosure tends to mislead an investor. Post comments on easily navigated websites so investors can assess the risk they are taking.
  15. Prohibit any credit scoring, bond rating, securities rating where there is any connection, funds transferred, or other relationship between the entity issuing the rating and the issuer of the securities, making the loan, borrowing money or buying anything. 

2 Responses

  1. That is very important section. You are possibly that a good broker. Thanks.

  2. Up to 70 percent of early payment defaults may be linked to borrower misrepresentations on mortgage loan applications, according to the FBI’s Mortgage Fraud Report. Most of the people in default are not innocent folks. The misrepresented information to get loans they otherwise would not have received? Why should people who have committed loan fraud be bailed out?

    ANSWER: (1) Putting aside blame for a moment, if we don’t find a way out of this, you and I will suffer from gross inflationary pressures, loss of value of what dollars we have and the likelihood of reprisals of various sorts from foreign governments and foreign investors all of which will drive down the value and viability of our economy. Go back to my blog and see the suggestions I have for getting us out of this mess. (2) You are right about the people who signed onto this. But it is a bit like the legal doctrine of comparative negligence: do we let the liar off the hook, just because the the person who believed the lie should have known better? Both should share the burden. Right now, the people least able to bare that burden are the ones getting the brunt of it — the borrowers on one end of this and the investors on the other end of this. Let’s remember that the borrowers were buyers not just borrowers. They were led to believe that the value of their purchase was what they were paying for it and was going up daily. For unsophisticated people, this is many times enough for them to overlook the fundamentals. They just don’t have the time or knowledge to analyze these exotic deals.

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