One of the hardest things for people to get their minds around is how borrowers were defrauded. The nagging question keeps coming to mind “But you DID sign the loan and take the money, didn’t you?” Yes you did, but you did it because of a representation and virtual guarantee from several parties at the closing table who knew the appraisal was a lie, that you were believing it, that you relied on it, and that you never would have done a deal where the real appraised fair market value was far less than the amount of the loan.
So then the question becomes “How can you be sure the appraisal was inflated? Were all appraisals inflated? How do you know that?” Answers: Read on, YES, Read On, in that order.
I start with the proposition that the only legitimate factors that cause changes in housing prices (up or down) are changes in supply and demand, rising costs or labor and materials and related services. Anything else is a manipulation UNLESS it is thoroughly disclosed in language that a normal reasonable person would understand. Even if such disclosure is made and the deal goes through BOTH parties would be defrauding someone by definition, to wit: they are agreeing that the stated price or value of the property is inflated but they are doing the deal anyway.
How could anyone inflate the price of a house without everyone knowing it? ANSWER: By inflating the entire market in that geographical area. Note that during the securitization era, ONLY the places that were targeted had sharply rising prices, sometimes from one month to the next. Other places, like Seneca Falls, NY (highlighted in NY Times article) were not not affected by either the boom or bust except indirectly where they are dealing with decreased services from the state and county resulting from budget deficits resulting from an expectation of rising revenues based upon the apparent rise in tax appraised value.
How does one inflate values of any commodity or property in the entire relevant marketplace? ANSWER: By creating false liquidity (i.e, availability of money) and by speculation pushing up the “value” of the derivatives and other hedge products which in turn raises the value of the actual commodity, or in our case, the actual house. Since the cost of the money decreases, despite government attempts to raise interest rates, and speculation is allowed without supervision, the speculators control the market on the way up and on the way down. They win on both sides because they are controlling the events. That is not a free market. That is a privately controlled market.
So the reason I am sure that false appraisals were the rule, not just the norm are as follows:
- There was no abnormal trends or changes in demand, supply, or costs — except that supply actually outpaced demand by a factor of at least 200%. Thus prices should have probably dropped as developers increased competition for buyers. There is no observable reason for prices to rise, much less at the pace seen in the period 2002-2007. By all public accounts it will be at least 2030 before the current inventory of houses are sold. This level of overbuilding is unprecedented and cannot be tied to an expectation of increased demand but rather an expectation that the seller controlled the transaction and collectively with loan brokers, originators, aggregators, and investment bankers would do anything to close the deal even if it meant having the borrower sign for a loan that called for NO PAYMENTS.
- 8,000 certified licensed appraisers signed a petition to Congress in 2005 complaining they were being coerced into justifying the deal rather than actually estimating fair market value. They feared they would be blacklisted from all the deals because an honest appraisal would have slowed down sales of homes and sales of financial products to borrowers.
- This was a complete reversal of practices existing before the securitization era. The value of the collateral was the Lender’s only guarantee of repayment. hence the tendency was to minimize the estimate of fair market value. Once the risk of repayment was eliminated “lenders” (i.e., mortgage brokers and originators) were under pressure to close loan transactions dollar volumes. The easiest way of doing that was to increase the value of the properties. The more this practice took hold of meeting the contract terms which were always disclosed to the appraiser (contrary to prior practice) the easier it became, since the “comparables” used by the appraisers were produced by the same practice, incentives and pressures. As the mortgage bonds were sold in increasing dollar volumes, the pressure to place investment dollars increased exponentially. Incentives for mortgage brokers and originators to close deals at any level of risk or terms increased proportionately. Marketing and selling of loan products became big business, with large fees and apparently no risk as the managers of such companies perceived it. The upward pressure to increase the size of loans directly resulted in an upward pressure on sale prices and the perception of “value” in the marketplace. A snowball effect was thus created producing a spike in housing prices that is completely unprecedented in the history of housing since the 1870’s when such measurements began to be recorded. No other boom or bust cycle in any part of the country had ever experienced spikes of this magnitude.
- Starting 3-4 loan products in the 1970’s, the number of possible loan products has skyrocketed to over 400 different kinds of loans — a bewildering array that increases asymmetry of information — causing the buyer to depend and rely upon the more sophisticated side (“lender”) for information about the loan product they were steered into.
- The number of loan originating companies masquerading as actual lenders went from 1 (Household Finance, now HSBC) to hundreds during the entire securitization period (circa 1990-2008) and then back down again as most of them went out of business, liquidated, or went bankrupt. New business start-ups would not have flooded the market but for the virtual certainty of high fees without regard to whether the product worked or not (i.e., whether the loan was repaid or not).
- The amount of money attributable to derivatives that increased availability of loans increased from zero in 1983 to more than $30 trillion in 2007 — twice the Gross National Product of this country.
- I see no reason for price increases other than the flood of money into certain marketplaces, which in turn gave some color of verification of an appraisal that was plainly wrong, inflated, and where fees for such appraisals increased geometrically.
Yes they were virtually all inflated. That was the requirement. Just as the rating agencies falsely inflated the value and risk of the mortgage bonds that were used to attract the $30 trillion in capital used to flood the marketplace, the appraisers likewise inflated the appraisals of the value and thus the risk to the borrowers AND investors. The proof is simply in the present situation where prices have fallen by as much as 80%. This is further corroborated by the price levels before the flood of money into the marketplace. The final verification is that median income was flat during this period. Most economists and housing experts agree that ultimately median income is the main determinant in housing prices.
How do I know this is true? It is the only workable explanation that is being offered, even including comments, reports and statements issued by the financial services industry.
For an example of how this has worked against the poorest, starving people of the world, see the following, which demonstrates that the Wall Street process, if unregulated, leads to bizarre social and financial consequences.
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Johann Hari: How Goldman gambled on starvation
Speculators set up a casino where the chips were the stomachs of millions. What does it say about our system that we can so casually inflict so much pain?
Friday, 2 July 2010
Free list Of Banks Doomed To Fail.The Banks and Brokers X List.
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It starts with an apparent mystery. At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people – mostly children – couldn’t afford to get food any more, and sank into malnutrition or starvation. There were riots in more than 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, calls it “a silent mass murder”, entirely due to “man-made actions.”
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Earlier this year I was in Ethiopia, one of the worst-hit countries, and people there remember the food crisis as if they had been struck by a tsunami. “My children stopped growing,” a woman my age called Abiba Getaneh, told me. “I felt like battery acid had been poured into my stomach as I starved. I took my two daughters out of school and got into debt. If it had gone on much longer, I think my baby would have died.”
Most of the explanations we were given at the time have turned out to be false. It didn’t happen because supply fell: the International Grain Council says global production of wheat actually increased during that period, for example. It isn’t because demand grew either: as Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi has shown, demand actually fell by 3 per cent. Other factors – like the rise of biofuels, and the spike in the oil price – made a contribution, but they aren’t enough on their own to explain such a violent shift.
To understand the biggest cause, you have to plough through some concepts that will make your head ache – but not half as much as they made the poor world’s stomachs ache.
For over a century, farmers in wealthy countries have been able to engage in a process where they protect themselves against risk. Farmer Giles can agree in January to sell his crop to a trader in August at a fixed price. If he has a great summer, he’ll lose some cash, but if there’s a lousy summer or the global price collapses, he’ll do well from the deal. When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked.
Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into “derivatives” that could be bought and sold among traders who had nothing to do with agriculture. A market in “food speculation” was born.
So Farmer Giles still agrees to sell his crop in advance to a trader for £10,000. But now, that contract can be sold on to speculators, who treat the contract itself as an object of potential wealth. Goldman Sachs can buy it and sell it on for £20,000 to Deutsche Bank, who sell it on for £30,000 to Merrill Lynch – and on and on until it seems to bear almost no relationship to Farmer Giles’s crop at all.
If this seems mystifying, it is. John Lanchester, in his superb guide to the world of finance, Whoops! Why Everybody Owes Everyone and No One Can Pay, explains: “Finance, like other forms of human behaviour, underwent a change in the 20th century, a shift equivalent to the emergence of modernism in the arts – a break with common sense, a turn towards self-referentiality and abstraction and notions that couldn’t be explained in workaday English.” Poetry found its break with realism when T S Eliot wrote “The Wasteland”. Finance found its Wasteland moment in the 1970s, when it began to be dominated by complex financial instruments that even the people selling them didn’t fully understand.
So what has this got to do with the bread on Abiba’s plate? Until deregulation, the price for food was set by the forces of supply and demand for food itself. (This was already deeply imperfect: it left a billion people hungry.) But after deregulation, it was no longer just a market in food. It became, at the same time, a market in food contracts based on theoretical future crops – and the speculators drove the price through the roof.
Here’s how it happened. In 2006, financial speculators like Goldmans pulled out of the collapsing US real estate market. They reckoned food prices would stay steady or rise while the rest of the economy tanked, so they switched their funds there. Suddenly, the world’s frightened investors stampeded on to this ground.
So while the supply and demand of food stayed pretty much the same, the supply and demand for derivatives based on food massively rose – which meant the all-rolled-into-one price shot up, and the starvation began. The bubble only burst in March 2008 when the situation got so bad in the US that the speculators had to slash their spending to cover their losses back home.
When I asked Merrill Lynch’s spokesman to comment on the charge of causing mass hunger, he said: “Huh. I didn’t know about that.” He later emailed to say: “I am going to decline comment.” Deutsche Bank also refused to comment. Goldman Sachs were more detailed, saying they sold their index in early 2007 and pointing out that “serious analyses … have concluded index funds did not cause a bubble in commodity futures prices”, offering as evidence a statement by the OECD.
How do we know this is wrong? As Professor Ghosh points out, some vital crops are not traded on the futures markets, including millet, cassava, and potatoes. Their price rose a little during this period – but only a fraction as much as the ones affected by speculation. Her research shows that speculation was “the main cause” of the rise.
So it has come to this. The world’s wealthiest speculators set up a casino where the chips were the stomachs of hundreds of millions of innocent people. They gambled on increasing starvation, and won. Their Wasteland moment created a real wasteland. What does it say about our political and economic system that we can so casually inflict so much pain?
If we don’t re-regulate, it is only a matter of time before this all happens again. How many people would it kill next time? The moves to restore the pre-1990s rules on commodities trading have been stunningly sluggish. In the US, the House has passed some regulation, but there are fears that the Senate – drenched in speculator-donations – may dilute it into meaninglessness. The EU is lagging far behind even this, while in Britain, where most of this “trade” takes place, advocacy groups are worried that David Cameron’s government will block reform entirely to please his own friends and donors in the City.
Only one force can stop another speculation-starvation-bubble. The decent people in developed countries need to shout louder than the lobbyists from Goldman Sachs. The World Development Movement is launching a week of pressure this summer as crucial decisions on this are taken: text WDM to 82055 to find out what you can do.
The last time I spoke to her, Abiba said: “We can’t go through that another time. Please – make sure they never, never do that to us again.”
Filed under: bubble, CDO, CORRUPTION, Eviction, evidence, expert witness, foreclosure, foreclosure mill, foreign relations, GTC | Honor, investment banking, Investor, Mortgage, Pleading, securities fraud, STATUTES, taxes | Tagged: appraisals, derivatives, loans, mortgage bonds, ratings |
how come i am not surprised.
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I have always contended that the signatures on those documents are nothing more than EVIDENCE of the Induced Fraud committed by the lender.
In our case – the original lender was nothing more than a broker. I downloaded their 8-K filing from the SEC
…per pg 8 – section Mortgage Banking
• We conduct mortgage banking activities through C&F Mortgage;
• C&F Mortgage offers a wide variety of residential mortgage loans, which are originated for sale to numerous investors.
• C&F Mortgage does not securitize loans.
• Purchasers of loans include, but are not limited to, Citimortgage, Inc.; Countrywide Home Loans, Inc.; Franklin American Mortgage Company; the Virginia Housing Development Authority; and Wells Fargo Home Mortgage.
• Revenues from mortgage banking operations consist principally of gains on sales of loans in the secondary mortgage market, loan origination fee income and interest earned on mortgage loans held for sale.
This one below I like most explains their motivation perfectly…
• At December 31, 2006, C&F Mortgage had rate lock commitments to originate mortgage loans amounting to approximately $23.77 million and loans held for sale of $53.50 million.
o C&F Mortgage has entered into corresponding commitments with third party investors to sell loans of approximately $77.27 million.
o Under the contractual relationship with these investors, C&F Mortgage is obligated to sell the loans only if the loans close. No other obligation exists.
o As a result of these contractual relationships with these investors, C&F Mortgage is not exposed to losses nor will it realize gains related to its rate lock commitments due to changes in interest rates.
• C&F Mortgage sells substantially all of the residential mortgage loans it originates to third-party investors,
Ya know – our loan settled Dec 29, 2006 – FRIDAY before the NEW YEAR… “…Under the contractual relationship with these investors, C&F Mortgage is obligated to sell the loans only if the loans close. No other obligation exists…” If that isn’t motivation to make sure that damn loan was settled – sign sealed & delivered – I don’t know what is…
Other revealing parts of the filing state that Individual performance bonuses are awarded ANNUALLY to certain memebers of management under the management incentive bonus policy – The Corporation’s Compensation Committee recommends to the Corporation’s board of directors the bouses to be paid… then the bonuses are based on performance…
The lender also has a REVOLVING CREDIT LINE with a warehouse lender… So, the lender is OBLIGATED to sell the loans ONLY IF THE LOANS CLOSE – no other obligation exists… Seems fairly clear – if they wanted to get credit for our loan they had to close it. The little issue that the house was completed – never inspected – and they used a FRAUDULENT U&O Permit – inflated our income by fromm 100k per yr to 300k per yr – none of that mattered – just close the damn loan to make sure bossman gets his bonus…
The fact that Countrywide then sold it to CWALT as MBS and the mortgage did not comply with the PSA – aside from not being completed – and the fact that Countrywide was most likely the TRUE Original Lender supplying the funds to our poser-lender… Violating Securities Laws probably doesn’t matter ether…
Our loan represents everything the investors have sued Countrywide for doing. In fact, the Trust – CWALT INC was part of several lawsuits for fraud…
Our mortgage violates the PSA and exactly what this bank is claiming in their SEC filing… AND THEY KNEW IT the entire time and I CAN PROVE THEY KNEW IT… The appraisal fraud is more than obvious – I have pictures of the house before during and after the appraisal showing the house was far from complete and the appraisal includes a Satisfaction of Completion Certificate… I have a letter from the county stating the house was not inspected and it has no legal U&O Permit… The PSA states that our loan MUST be immediately removed from the pool once it is known – they ALL KNOW IT. The foreclosure mill is on record claiming the “fully disclosed” our situation with their client (CW/BofA) and were instructed to foreclose… EVEN though we sent them a dispute letter with our attorneys information – called & explained further – then finally sent them a rescission letter attempting to force them file an injunction – but they simply ignored it all…
After the foreclosure mill was exposed for committing Fraud on the Court – filed false affidavits – using forgery – they withdrew their foreclosure…
If that isn’t a blatant attempt to prohibit due-process then what the hell is…? I filed a formal complaint with the state’s Attorney Grievance Committee against the foreclosure mill – demanding they be disbarred…
But we can’t even find an attorney with the balls to take these people on… they want us to walk – file bankruptcy – mitigate our causes – NOT A FREAKING CHANCE IN HELL !!
I appreciate these articles because with passing day – more & more folks are learning about these insurgent terrorists living within our midst. That’s exactly what these foreclosure mills & lenders are – terrorist insurgents and they should be treated with extreme prejudice…
..but then, maybe I’m biased…? 8-o na… not me…! 🙂