CBS Airs House of Cards: Closer to the Truth But Not Quite There — Line up the story of the borrower and the story of the investor and they are the same


CBS aired a 2 hour news special on the mortgage meltdown. For a change, the facts in it were entirely correct although some important facts were left out. There still remains a bias against the borrowers. While the case was made that the investors were defrauded and didn’t know what they were investing in, those investors were characterized as completely duped by the Triple AAA rating from Moody’s, Standard and Poor’s, and Fitch.Virtually no “blame” was assessed against them for not knowing what they were buying. These were huge “qualified” investors who didn’t read the fine print and of course, as Alan Greenspan said in his interview, “even if they had read it they would not have understood it.” He admitted he didn’t understand it either. My thesis is not that the investors shoud have been blamed but that the borrowers were in exactly the same position as the investors and were duped and deceived in exactly the same way using the same tools of deception.

On CNBC the argument was advanced that the fact that the investors didn’t and couldn’t know what they were actually buying was the fault of Wall Street. The quote “nobody put a gun to their head” was used against the borrowers and not the investors. The argument that the borrowers didn’t and couldn’t know what they were signing was never mentioned. The fact that both investor and borrower were treated identically in terms of withholding information and giving false information was never mentioned.

Missing from the otherwise excellent and moving news piece was the fact that just as investors were duped by a fraudulent appraisal of the security they were buying as “investment grade” when in fact it was junk, the borrowers were duped by a fraudulent appraisal of the value of the property when in fact the value was far lower, is now far lower, and will for years be far lower than what was represented by the appraiser and the lender at closing. Remember it is up to the Lender, by law, to verify the appraisal. The “lenders” in this case were merely conduits or mortgage brokers, whose insitutional charters were rented by Wall Street. So they dropped verification of value, they dropped verification of income and they dropped underwriting standards to determine viability of the loan.

In 2005, 8,000 appraisers petitioned the Federal government to stop illegal, fraudulent and improper appraisal practices that were inflating the “value” of home. Nothing was done. What is the difference between the inflated appraisal of the property and the inflated appraisal of the securities? None. What is the same is that neither was regulated and both were allowed to run wild.

  • The so called Stated Income or “Liar’s Loans” were lies of the mortgage broker and the Lender not of the borrower.
  • Only the mortgage broker and lender knew what income had to be “stated” to qualify for the loan.
  • Only the mortgage broker and lender had the access to the application to change the numbers on the application to “justify” the “underwriting” (a process that never actually occurred, unknown to the Borrower and well-known to Wall Street).
  • And only the mortgage broker and lender were in a position to gain the confidence and trust of the borrower, such that their assurances that this loan would work were willingly (and legally) accepted and relied upon by borrowers.
  • Line up the story of the borrower and the story of the investor and they are the same.

Let’s remember that this was a con game from one end to the other. The borrowers were not “in on it” any more than the investors were. And in states like Florida an army of con men (10,000 convicted felons were licensed as mortgage brokers) descended upon a public that had never seen this kind of behavior because until the securitization of loans the bank’s money was at risk, the loan officer’s job was at risk, and the stockholders were at risk. Reliance on the lender, which is what the Federal Truth in Lending Law provides, is both reasonable and legally binding. Everything else is politics and obfuscation.

Everyone who took a loan from 2001-2008 probably has a good claim against the pretender lender at closing and the people who made the closing possible — appraiser, mortgage broker, title agent, closing agent, escrow agent, title insurance company, property insurance company, property insurance agent, mortgage aggregator, CDO manager, Trustees, and salesmen who were selling worthless paper at both ends — “loans” to borrowers and “investments” to investors.

3 Responses

  1. Response to Article CBS News HOUSE OF CARDS

    Homeowner’s are not in the Same Boat as CDO investors. In my humble opinion investors who bought CDO’s based on a triple AAA rating from Moody’s, Standard and Poor’s and a home borrower are not in the same boat-not even close. Many of your CDO investors are institutional, including investors from foreign banks. They had or could afford teams of analysts, financial advisers, etc. Going on cruise control, relying on a rating is not an excuse for a financially savvy investor. How many full time analysts can an average homeowner afford? – None.

    People who had their retirement invested with CDO’s. I encouraged my customers to switch to Edward Jones. EJ customers faired much better then the market, as did the bank they invested in – Wells Fargo. Except for the Wachovia purchase, Wells was conservative; they closed their Alt-A division in 2006-07. If you did research, you would not have bought Wamu or Bear Sterns.

    The party was going to end when it began. As a broker “bartender” in the Southern California real estate “party”, which originated loans across the state, we saw an individual’s entire finances. At that time, 05’, the writing in my mind was on the wall. Borrowers did not see their homes as being capable of depreciation. Lower interest rates had driven the price of homes up, by driving the cost of payments down. This meant higher loan amounts. High interest credit card and car loans were converted into tax deductible mortgages. Many party-goers were tipsy by end of 2004, and drunk by end of 2005.

    Responsible lending. I was a responsible “bartender”. We recommended 30yr fixed 10yr I/O loans, (allowed keeping the 20% principle payment as a reserve/investment) ARM’s only if the property was for resale. We recommended for individuals to sell their homes rather than “eat the borrower alive” with a sub-prime loan. Homes are a poor place to invest your money, and no portion of it is liquid if needed. If necessary we would have a customer take a hit to the rate to make sure there was no prepay-keeping the borrower’s options open.

    People generally do not put effort into their financial decisions. I found fairly educated intelligent people; physician’s, lawyers (ha), businessmen make poor uninformed financial decisions. A chief physician client of mine was always at work, he didn’t have time for financial planning, for the $450k/yr he made. I found most hard working people will not put the effort into thinking through a financial plan. They are too exhausted at the end of each day.

    People do not read through contracts they sign -even lawyers. I dare you to find me a statistical sample of attorney’s who received ARM loans where greater than 10% read through the entire contract and understood their loan. Our society expects that people they deal with are trustworthy and rely on them to be the “expert” in their field. People do not read contracts because they are lengthy, drawn up and written by a major corporation and assume “this is the way it is”.

    The writing was on the wall in 05’. A hedge fund trader and I were sitting in a Café in La Jolla in the summer of 2005, he said to me Fibonacci retracement levels would say that because real estate was being traded as a commodity, it would retrace 38% before growing again. My reply was “I believe it will be worse-it will be carnage.” Later I read that there is another level of retracement-61.8%. On Fidelity Title’s website they had real estate market analysis tools, which I think only the analysis people and I ever used. I checked in on property value trends. By October of 2005, the trend was that values were going to recede and the indicator was to sell in Nov 05’. We sent a notice to our client’s to sell their income properties. But at the time everybody was drunk from the market gains; banks, CDO’s, realtors, brokers, appraisers, title reps and homeowners. They kept drinking and this market is the hangover.

    CDO holders on the other hand were in it for a profit. A profit higher than on similarly rated bonds. If the borrower’s are the investor left holding the bag (mortgage responsibility) and the CDO holder’s had an above average “guaranteed” return, then it is the borrower who is on the bottom of the “Ponzi” pyramid. In a Ponzi scheme a trustee can “claw-back” interest and principle from people who have innocently profited from the Ponzi. In this case, I believe homeowner’s should be able to recover their loss from the CDO holders.

    CDO Holders vs. Owner Occupied Homeowners – Judgment for the Homeowners and soon to be

  2. What can be done about judges that have a cushy job and who think the world has not changed.

    Nothing is as it seems!!!!

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