THEY ARE BACK! “NON-QUALIFIED LOANS” REPLACE THE LABEL OF SUBPRIME — WHY WOULD ANYONE WANT TO INCREASE THEIR RISK?

Before the era of securitization, the only reason for making riskier loans was that the lender could charge a premium for borrowing — a premium that would cover the higher cost associated with defaulting loans.

Now the reason is that the higher the risk, the more the Investment Bank makes and the more the mortgage broker makes on yield spread premiums. And the reason is that investment banks are continuing to literally take apart the loan and sell the parts for multiples of the principal loaned — all without disclosure or reporting to the only two parties who really matter — the investors and the borrowers.

President Obama, acting on advice received from his department of justice, said the behavior was reckless but not illegal. I’m sure he was wrong and motivated by the same raw fear that struck President Bush when he approved the bailout of Wall Street financial service companies most of whom had no loss and made a profit on the bailout.

But only hearing from one side (Wall Street) what did you expect them to do? Bush’s instinct was right. Let the banks fail if that is what is really happening. But then Hank Paulson literally went down on his knees begging for the benefit of the worst culprit on Wall Street, Goldman Sachs who pocketed tens of billions of dollars in profit from the bailout of AIG.

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As I have pointed out in the past, there are two yield spread premiums only one of which has received the attention of the mainstream press. The first one occurs when a mortgage broker steers a borrower into a loan that carries a higher interest rate. This yield spread premium produces a Higher Value Loan because the borrower actually qualified for a lower interest on the loan. So the premium that they were paying simply increases the net value of the loan, without increasing risk, producing a commission to the mortgage broker from the lender. Sometimes these commissions can be $10,000 or more for each loan.

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But there is a second yield spread premium that is far greater than the first. The second yield spread premium results from the difference between the amount that is collected from investors for origination and acquisition of loans and the amount that is actually loaned. This yield spread premium can actually be a significant proportion of the loan itself, or even exceed the amount of principal of the loan.
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The investor does not know that there was an immediate 50% loss in their investment because they are promised a revenue stream by the investment bank based upon income received by the investment bank from loans that were not actually owned by the investment bank except for a few days or weeks. The investor remains clueless.
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By burying the data on loans that are virtually guaranteed to fail in a pile of other loan data the Investment Bank is able to create an apparent sale of the loan at a premium. Of course you need to believe the labels that the investment banks put on such “trading.”
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For example, an investment of $1,000 by an investor seeking a return of 5% can result in a $500 yield spread premium that is retained by the Investment Bank— if the Investment Bank loans $500 at 10%. Do the math. Figures don’t lie but liars figure. The investor is seeking $50 per year. The borrower is paying $50 per year. But the Investment Bank only paid $500 for the loan, and then sold all the attributes of the loan, leaving it with no risk of loss. it takes a minute but it’s worth putting pencil to paper. Net revenue has  historically averaged $12,000 for every $1,000 loaned.
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That’s why pizza delivery boys came to be paid $500,000 per year selling mortgage products to borrowers.
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Those loans never disappeared but they are now rising in popularity again. It seems that fund managers and regulators have failing memories with respect to the 2008 crash. The success of Wall Street in dominating the conversation about their behavior is largely based on their success and having mainstream media and even Regulators adopt the labels used by Wall Street to describe what they are doing.
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So now we have subprime loans being labeled non-qualifying loans. The ostensible reason for the rise in popularity of such loans is that fund managers are hungry for higher returns. With interest rates historically low, it is difficult to find a rate of return on investment that is satisfactory to investors. And let’s not forget that fund managers often get bonuses or other incentives for subscribing to Investments that they know only look good on the front end. Later, when the investment turns bad, they run for cover.
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In the end the Playbook is the same. The disclosures are lacking as to exactly what the borrower is signing up for and exactly what the investor is signing up for. The media portrays securitization as the sale of loans to investors. But the loans are not sold to investors. It is the Investment Bank that originates the loan or acquires the loan and then sells off the attributes of the debt in what appear to be complex instruments. In fact though each of those deals amounts to the same thing — the sale of or bet on a promise to pay that is indexed on a loan that is no longer owned by the investment Bank.
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Just as they did before 2008, the investment banks are gearing up for another wave of foreclosure in order to have a Judicial stamp of approval on an illegal scheme. This of course overlaps with the continuation of the old scheme, under which hundreds of thousands of homes are still lost in foreclosure proceedings that are actually schemes that produce Revenue. in most cases, the proceeds from the sale foreclosed property do not ever go to pay the people who actually Advance the money for purchase or origination of the debt.
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Does anyone remember me saying in 2006 that what is about to happen will take generations to fix?
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4 Responses

  1. I remember…
    Though I would like to forget what is still a very painful experience for me. The theft of my adult working life labors.

  2. BTW… I don’t really think they ever left…. for those connected.

  3. I remember too

  4. I remember.

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