Livinglies's Weblog

I have received thousands of emails over the years in which partially informed laypeople have been radicalized into believing that the entire mortgage meltdown — and the meltdown in other transactions that were labeled as “loans” — was laid at the feet of the Federal Reserve.

First, let me say that they are not entirely wrong. But blaming it on low-interest rates is a concession that the transactions with homeowners, student, and other consumers was in fact a loan transaction. That is, a transaction in which at the end of the transaction cycle there was an identified, disclosed lender who had paid value for an alleged obligation owed by the consumer and owned (as an unpaid loan account receivable) by that creditor.

Once you concede that those were in fact loan transactions, the chaos is launched and both homeowners and investors are screwed. Homeowners, seeking loans that comply with lending laws, are convinced that is what they received. Investors, seeking a slightly higher return that magically appears from “diversification” are convinced that they bought a secured instrument “backed” by mortgage liens and guarantees from investment banks. Investors were quicker to discover they had been duped. Homeowners are still lost in the weeds.

Seeing the Fed as a cabal whose goal is to destroy the world order is not helpful although the reliance on low-interest rates to keep the economy moving ahead is at best debatable policy.

The Fed’s direct role is minuscule. Lower interest rates in the real world pale by comparison to a shadow banking marketplace that started at zero in 1983 and is now somewhere ar found $1.4 quadrillion dollars (about 15 times the size of the fiat marketplace consisting of what central banking call money or cash equivalents). That shadow banking marketplace is where a trading market gives the illusion of some sort of value to virtual transactions — i.e., transactions that don’t actually exist but are referenced and then taken as real.

There is no legal basis for a shadow banking market or for virtual transactions — either they happened or they didn’t. If they did happen there is legal significance regardless of whether the paperwork is right or wrong. If the transactions didn’t happen the paperwork is at best Irrelevant and at worst fraudulent.

Indirectly, the failure of multiple agencies including the Fed to regulate entry into the lending marketplace by noninstitutional non-lender actors who were in it to issue securities (rather than issue loans) was the near doom of the country.

It was not just low rates that caused the meltdown. It was the fact that Wall Street does not and did not originate loans and could offer crazy incentives to create the illusion of a viable loan transaction when there was no hope that it could ever be sustained — including the biggest fraud against homeowners, which was appraisal fraud.

By offering no closing costs, and reverse amortization loans securities firms locked in instant profits that ran from 35% to 300% of the transactional amount with homeowners. Then they made a multiple of those profits by engaging in the creation and sale of derivative bets on the initial sale of certificates that were NOT conveyances of ownership in individual or group loans.

At that rate, they could offer no payments at all and still make money. Thus homeowners were incentivized to enter into the transactions because they were guaranteed “approval” on a “Loan” when in fact they were consenting to a highly speculative transaction in which they receive none of the profits, all of the losses, and a virtually guaranteed loss — i.e., the value of the home was always a fraction of the price and appraisal creating an immediate loss.

Filed under: foreclosure |