Reason No. 345678 for the mortgage fiasco

[Okla-homey]

I happen to know of a situation involving a small-time homebuilder who greased licensed home appraisers to over-value his houses, greased mortgage brokers to offer mortages for the inflated amount and not look too closely at the borrowers income to debt ratio or other bona fides, then sold the houses to willing and complicit "buyers" who played along in exchange for a sizeable (six figure) cash kickback from the builder after the closing.

Then, the new "homeowner" never made a single mortgage payment and rode off into the sunset with his ill-gotten gains jingling in his saddlebags.

Oh, and the crooked mortage broker? He didn't lose a dime because he sold the paper within a week of the closing.

The builder? He's laughing because he still made about 25% profit on each house even after the 25% kickback to the guy who signed on the dotted line for the mortage.

The greedy but hapless mortgagee forecloses, but cannot hope to recover anything close to what they have in the loan because of the watered appraisal.

Now, I don't know if this happened a lot elsewhere, but if it could have gone on for what appears to be a few years in a rural and remote part of OUr state, what do you think was happening elsewhere across the fruited plain?

Bottomline: I'm just a guy from small-town southern Oklahoma with a liberal arts degree, but I don't see why the taxpayers need to come to these mortgage company's rescue. Granted, this may just be an isolated set of circumstances, but I bet it ain't. In fact, I bet it'll be years before we learn of all the crimes committed in the name of making the dream homeownership a reality. If we ever do.

[tommieharris91]

Those crimes were enabled by our elected officials about a decade ago.

[OUHOMER]

It's all fraud, wish they would investigate each and every house setting out there that was sold for X amount over what it should have been worth.
throw the appraiser in jail, throw the first mortgage broker in jail etc.

[JohnnyMack]

It's why we need more regulation.

Greed isn't democrat or republican or conservative or liberal or rural or urban.

[Okla-homey]

It's why we need more regulation.

Greed isn't democrat or republican or conservative or liberal or rural or urban.


WTF is there to regulate in the above scenario? The perps are unethical jerks at best, criminals at worst. Criminals don't sweat regulations.

I still think the best thing is to make the lending industry take its lumps and it will tighten up its own act. All you do by bailing out these jerks is cause them to go, "phhew, that was a close one! We'll have to be smarter about our dirty deeds next go round. But at least we get to keep the loot we stole."

[bluedogok]

People did that all over and the mega-builder companies were probably the worst about it because they had their own mortgage companies setup to finance the houses they built (the same model as the car companies) and sell off the paper. Their margins on houses was even greater because of the quantity discounts they were able to achieve because a company like Centex was building a million houses a month so they could naturally negotiate massive discounts....and most of what they built will be crap in 25 years or less.

[yermom]

WTF is there to regulate in the above scenario? The perps are unethical jerks at best, criminals at worst. Criminals don't sweat regulations.

I still think the best thing is to make the lending industry take its lumps and it will tighten up its own act. All you do by bailing out these jerks is cause them to go, "phhew, that was a close one! We'll have to be smarter about our dirty deeds next go round. But at least we get to keep the loot we stole."

not selling loans might be a start.

[BigRedJed]

Dude. Srsly.

[bluedogok]

The selling off of loans based on fradulent valuations is what (in part) fueled the oil/real estate boom in the late 70's/early 80's and the Penn Square Bank/S&L failures were one of big the factors in the bust.

What is old is new again, and just gets bigger with each successive boom/bust cycle.

[SoonerKnight]

It's why we need more regulation.

Greed isn't democrat or republican or conservative or liberal or rural or urban.

It's human! Every play monopoly and not argued during the game! Greed not just a game! :D

[Okla-homey]

Timeline:

- Community Reinvestment Act (1977) Jimmy Carter wants a house in every pot regardless of ability to make mortgage payments. Jimmy thinks that financial institutions are racists for not giving houses away. Luckily, there's few teeth in the CRA at this point and it has little impact. Jimmy gets shown the door in 1980.

- Community Reinvestment Act Expansion (1995) After sponsoring a bunch of studies to "prove" mortgage providers are racists (actually they proved that mortgage providers didn't like to make mortgages that stood little chance of being paid back) Bill Clinton delivers a house in every pot through sanctions on institutions who don't play along. The teeth are now in the CRA. The CRA now drives an artificial housing boom with corresponding artificial rises in home values well above inflation. House values will never decrease, will they? Green sky at night, flipper's delight.

- Somewhere along in here, Bear Sterns figures out a way to bundle worthless mortgages together and sell them as investments on Wall Street. Others soon follow. The investment rating companies act like they've been struck in the head and have lost all common sense.

- George Bush tries to reign in Fannie Mae and Freddie Mac (2003) Democrats in Congress stop it and call Bush a racist because he's concerned about "affordable" (read as worthless) mortgages that will never be paid back.

- Congress tries to reign in Fannie Mae and Freddie Mac (2005) Democrats in Congress stop it and call all Republicans racist because they acknowledge that the "affordable" (read as worthless) mortgages will never be paid back. People are getting the keys to houses by simply signing their names 24 times and clicking their heels together. Other people are taking advantage of this absurdity and trading up to McMansions that are selling for about 5 or 6 times what they can really afford.

- Trick or Treat! (2007) A lot of the "trick" mortgages start to deploy their tricks. Since a lot of people have nothing invested other than some artificially low "trick" payments essentially equivalent to having paid rent, they start to walk away. Some mortgage lenders start to wake up and pull back a little. The house of cards begins to sway in certain parts of the country.

- "Affordable" (Read as Worthless) Mortgage Bubble Bursts (2008) The Democrats know who's to blame for their latest social engineering failure: George Bush.

[LesNessman]

Wrecks, Lies, and Barney Frank

excerpts:

"Democrats have a lot to hide about their role in creating the current financial crisis and are doing their best to appear blameless with charges directed elsewhere.

Within hours of the fall of their affirmative-action-lending-policies house-of-cards, they rose united to wag accusing fingers at Wall-Street greed and the failures of an unregulated free market. And even as new transcripts and videos surface daily revealing an irrefutable connect to a decades-old liberal push to increase availability of home mortgages to high-risk minority borrowers, the counterfeit clarion call against "predatory" capitalism continues. This fraudulent tactic is meant to not only exonerate accountable Democrats -- and one Massachusetts congressman particularly -- but to provide them cover to insist the same quixotic liberalism fueling the problem be included in any government-sanctioned solution."


"Indeed, the list of blameworthy Democrats is long and distinguished. However, Frank's recent thin-skinned written and spoken admonishments to those daring to confront previous related actions and statements betray a man whose hands may be deeper into this fiasco than any other sitting politician's. "

http://www.americanthinker.com/2008/10/wrecks_lies_and_barney_frank.html


Enron was raked over the coals, and rightly so.

This FM & FM is Enron on steroids, times a thousand, and then multiplied by 2, but the major players (Frank, Dodd, Waters, Schumer, Raines, et.al.) are getting an absolute free ride. I know there are some republicans to blame as well, and they should pay, but the large majority of those responsible are dem party stalwarts. Even Obama has received more money from Fannie and Freddie than everyone except Dodd, and J. Kerry is right behind Obama! And Raines is an Obama advisor for cryin' out loud!

Pathetic.

[Vaevictis]

- Community Reinvestment Act Expansion (1995) After sponsoring a bunch of studies to "prove" mortgage providers are racists (actually they proved that mortgage providers didn't like to make mortgages that stood little chance of being paid back) Bill Clinton delivers a house in every pot through sanctions on institutions who don't play along. The teeth are now in the CRA. The CRA now drives an artificial housing boom with corresponding artificial rises in home values well above inflation. House values will never decrease, will they? Green sky at night, flipper's delight.

Jeebus, how many times do we have to go over this nonsense?

http://www.fdic.gov/regulations/laws/rules/6500-2515.html


SEC. 804. (a) IN GENERAL.--In connection with its examination of a financial institution, the appropriate Federal financial supervisory agency shall--
(1) assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution; and
(2) take such record into account in its evaluation of an application for a deposit facility by such institution.

IOW, the law provides an absolute defense to the CRA with respect to irresponsible lending. My understanding (from what Mike Rich has said) is that all the CRA does is prohibit discrimination based on the location of the home loan; other discrimination (such as the ability to pay) is totally acceptable under the CRA.

http://www.house.gov/apps/list/hearing/financialsvcs_dem/barr021308.pdf


More than half of subprime loans were made by independent mortgage companies not subject to comprehensive federal supervision; another 30 percent of such originations were made by affiliates of banks or thrifts, which are not subject to routine examination or supervision, and the remaining 20 percent were made by banks and thrifts.

http://www.frbsf.org/news/speeches/2008/0331.html


Before I turn to potential interventions, I want to make one final point. There has been a tendency to conflate the current problems in the subprime market with CRA-motivated lending, or with lending to low-income families in general. I believe it is very important to make a distinction between the two. Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans, and studies have shown that the CRA has increased the volume of responsible lending to low- and moderate-income households. We should not view the current foreclosure trends as justification to abandon the goal of expanding access to credit among low-income households, since access to credit, and the subsequent ability to buy a home, remains one of the most important mechanisms we have to help low-income families build wealth over the long term.

[Vaevictis]

If you want to know what the real problem is, it's right here:


Oh, and the crooked mortage broker? He didn't lose a dime because he sold the paper within a week of the closing.

This, coupled with the fact that the bond ratings agencies kept giving AAA ratings to CMOs made up of this trash is the real root of the problem with respect to the CMOs.

Basically, the bond ratings agencies defaulted on their obligation to do good due diligence.

Mark-to-market accounting is exaggerating the problem, too, so it's not helping any right now.

[JohnnyMack]

If you want to know what the real problem is, it's right here:



This, coupled with the fact that the bond ratings agencies kept giving AAA ratings to CMOs made up of this trash is the real root of the problem with respect to the CMOs.

Basically, the bond ratings agencies defaulted on their obligation to do good due diligence.

Mark-to-market accounting is exaggerating the problem, too, so it's not helping any right now.

Weren't the rating agencies owned by the people who owned the loans in the first place?

[Vaevictis]

Weren't the rating agencies owned by the people who owned the loans in the first place?

Moody's is independent, S&P is a division of McGraw-Hill, and Fitch is a subsidiary of Fimilac. AFAIK, these guys don't own operate in these markets like that, at least not on any major scale.

I don't think they could, actually. Would you rather buy risk assessment from an independent third party, or a competitor who has an interest in having you go under?

[Chuck Bao]

Weren't the rating agencies owned by the people who owned the loans in the first place?

No, but the rating agencies are paid by the issuer.

[Okla-homey]

No, but the rating agencies are paid by the issuer.

BINGO! We have A WINNUH!

Kinda like "expert witness" testimony. The party putting the expert on the stand pays him. Leading to the often used appelation, "hired gun." In short, IMHO, you can find an expert you will testify that water ain't wet if you are willing to pay enough.

[Penguin]

I also think America's mentality is to blame, especially my parents' generation. They preached to me as a kid that everybody should own a home. It's America's dream to own a home. In fact, my parents used to call poor people "renters", like that was a huge insult. People were buying houses right out of college. Hell, my sister bought a house at 18. It just seemed natural. We all believed that you are a poor, pathetic loser if you ever lived in an apartment.


I think that kind of stuff needs to be re-evaluated. We need to stop putting pressure on young people to get a mortgage before they are financially responsible.

[FaninAma]

So who, after this mess all collapses and the bailout proves futile, will take the Big Fall and do the perp walk?

I hope it's Hank Paulson.....the Chicom loving bastard.