How Bush's Mortgage Freeze will burn us all.

[flamin lib]

Hot investment tip: document shredders.

First the Treasury department started a fund to buy risky hedge funds made from bundling sub-prime mortgages into securities. If only the bankers were shored up everything would be fine. Note that the same thing could have been accomplished by starting a fund to help homeowners pay their mortgages but as always Republicans see only Corporations, not people. Next they were going to use Fannie Mae and Freddy Mac to refinance all those risky sub-prime loans. Only thing is both of those institutions are more or less bankrupt, so they'll have to get more money from the government.

Now comes “The Freeze”. Interest rates on sub-prime adjustable loans will be frozen for five years. It's being sold as benefiting the homeowner and the working family. Ostensibly this will allow homeowners to continue making payments until the industry turns around and home values grow to cover the amount of the loans. What it actually does is buy time for loan originators to cover their tracks. The real issue isn’t re-setting interest rates, it’s the mortgage security purchase agreement. If there is fraud in the origination of the bundled loans the lender is required to buy the security back at face value. At present many of the sub-prime based securities are worth only a small fraction of face value.

Is there that much fraud in the sub-prime market? You betcha! A very large number of loans were made without documentation of the borrower’s income. They’re called “no-doc” loans and were issued with only the borrower’s statement of income. In many cases the borrower wasn’t the one filling out the statement of income, it was the lender. The statement was just one page in the stack of papers signed at closing. Another widespread practice was padding the borrower’s income. If a borrower owned one home and wanted to buy another but couldn’t qualify for two mortgages it was common to claim the first home as rental property with enough income to cover the first mortgage. It worked out fine as long as the first home sold quickly.

Then there’s the seller side of the transaction. In 2004 and 2005 some of the largest lenders – you hear their names on TV all the time, you know, the ones who are on your side – were making loans without even appraising property. This was permission for the seller to rape and pillage. Sellers were inflating values with the co-operation of real estate agents and title companies. If the seller wasn’t working with one of those lenders the appraiser could be bought if the lender would cooperate. Estimates are that more than half of the sub-prime loans involved some level of fraud, enough that most of the continuing education classes I took for my Real Estate license were about loan and mortgage fraud.

What’s the real goal of the five-year freeze? To buy enough time to re-finance the fraudulent loans through Fannie Mae and Freddy Mac. If they can re-finance before bondholders sue for buy-back, the lenders can say the loans are based on solid practices and not fraudulent. It will also buy enough time to purge emails, policy memos and other evidence of widespread fraud.

Ah, you say, I’m having a tin-foil moment because surely all the big financial institutions couldn’t be blind to this much fraud! You’d be right, all of them weren’t. Goldman Sachs bet heavily against the mortgage security market from ’04 to ’06 while they were still selling the bundled loans. Citygroup, Morgan Stanley, Bear Sterns, Merrill Lynch all got hammered because they failed to bail out as soon as Goldman did. The head of Goldman, Henry Paulson, is now Secretary of Treasury and is orchestrating the rescue of US lenders. If I were Sen. Chuck Schumer instead of asking how much more money Henry needs for his banking buddies I’d ask what he knew and when he knew it.

Bottom line is the tax payer will wind up bailing out the banking industry and the CEOs will continue to make hundreds of millions while they run the business into the ground.

All this was made possible by the de-regulation of the banking industry in 1999. Read about that here: http://journals.democraticunderground.com/flamin%20lib/50

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/12/09/IN5BTNJ2V.DTL&hw=interest+rate+%27freeze%27&sn=001&sc=1000

[melody]

1. Making money out of destroying businesses is what the Bush boys do best

I've no doubt this was all on purpose.

[no_hypocrisy]

2. I want to know how can these borrowers refinance if they still have

poor credit histories? No bank will touch them.

[flamin lib]

3. That's where Fannie Mae, Freddy Mac and FHA come in.

With the backing of the Federal Government they can take more risky loans than commercial banks. Because the Federal Governement sets the rules they can change the qualifications to be even more risky. Under the new rules they will make loans they know will foreclose to cover the fraud in the original loans. Because they are backed by the full faith and credit of the US it will be you and me who pay for the greed of sub-prime lenders. Read the link to the 1999 de-regualtion.

Note-the FHA does not lend money, it guarantees the loans made by commercial banks. If the loan defaults FHA picks up 80% of the loan.

[formercia]

5. and 80% is better than 20%

along with a clean piece of paper.

[flamin lib]

6. Actually most of the sub-prime loans were made with an 80/20 split.

80% first mortgage with a 20% second. The second mortgage holder is SOL in a foreclosure--they can get a judgement worth less than nothing but nothing from the FHA. The first mortgage holder is paid in full and HUD takes possession of the property. That's where all those "HUD houses" come from.

on edit

With only 80% on the first mortgage the borrower doesn't have to pay PMI (private mortgage insurance) that would cover FHA's expenses. You and I get doubly screwed.

[EnviroBat]

7. That's the deal the scumbags were trying to goad me into...

Fortunately for me, I didn't fall for their crap.

[flamin lib]

8. 80/20 isn't a bad deal for the borrower. Mortgage insurance increases

your payment. If you can avoid it you will save money. However, it isn't a good deal for the second mortgage holder if the borrower defaults and it isn't a good deal for us tax payers either.

You still have to qualify for 100% financing which was ridiculously easy between '02 and '06. There were 100% deals for anyone with a credit score over 550.

[EnviroBat]

9. Yep, but they weren't willing to give me a fixed rate...

[flamin lib]

10. 'Nuff said!

[Richard Steele]

4. K&R