Return to the Buying and Selling Homes Forum | Post a Follow-Up

 o
Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

Posted by logic (My Page) on
Thu, Jan 20, 11 at 10:35

Excellent article...in it's entirety. Go to the link below in order to click on the links within the article.


Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

By ABIGAIL FIELD Posted 6:30 AM 01/20/11 Columns,

Economy,Real Estate, Credit
Comments Print Text Size A A A

Home foreclosure protest.

As the foreclosure crisis has escalated over the past several months, one overarching debate has been about who bears the most blame: homeowners or banks?

After everything I've learned and written about the foreclosure mess, my verdict is: The banks are responsible for 90% of the problem, troubled homeowners 10%.

Yes, every foreclosure involves a homeowner not paying his mortgage. But every foreclosure also involves a bank that made the loan. And usually another bank, or several more, that profited from securitizing the loan. And still another bank, or several, that profited from servicing the loan. Together, those banks have done three things that created the massive glut of foreclosures choking America's legal systems and laying waste to its real estate markets:

* They knowingly made millions of loans doomed for foreclosure as soon as the check was written.
* They deliberately and/or incompetently failed to modify many salvageable mortgages.
* They were so careless with their paperwork and processes that they've undermined the rule of law, clouded the title to untold numbers of properties and complicated the processing of the massive backlog of foreclosures that hurts the economically crucial real estate market.

Let's take a closer look at each factor.

What Happened to Underwriting?

Getting a mortgage isn't supposed to be as easy as getting cash from an ATM. Banks are supposed to make applicants prove they can repay loans before giving them. The process is called underwriting, and it's one of the most basic in banking.

Yet during the housing bubble, banks largely stopped underwriting in any reasonable way. Indeed, if the banks had been underwriting throughout, the bubble could never have inflated so much.

If you want to get a vivid and entertaining overview of the dynamics that eliminated underwriting, listen to Planet Money's interviews of people at every stage of the process, from making the home loan through its ultimate securitization.

The mortgages made without underwriting have lots of names: Low-doc loans (the borrower stated her income without proof, but proved the assets she claimed to own, or vice versa), no-doc loans (borrower stated both income and assets without proving either), NINJA loans (no proof of income, job or assets). They're all known as liar's loans. According to a recent Forbes article, in 2006 and 2007 liar's loans accounted for 40% of new mortgages, and more than 50% of new subprime mortgages.

The Banks Knew Mortgage Applications Were Fraudulent

Now here's the thing: No one forced the banks to make those loans, even if the applicants were lying about their ability to repay.

People shouldn't be sympathetic to banks that effectively say: "Hey, we knew the applicants were lying and wouldn't be able to repay the loans. We didn't care because we didn't hold onto the loans. We offloaded the risk to investors through the securitization process. But so what? Blame the deadbeat borrowers for the volume of foreclosures today."

Why is it fair to say the banks knew they were being lied to? Well, beyond the obvious -- everybody in the business used the term liar's loan -- the FBI warned about mortgage fraud back in 2004. And take a look at this 2006 fact sheet from the Mortgage Brokers Association for Responsible Lending that analyzed data from 2004 and 2005. By doing a quick check, the group found that 90 out of 100 stated-income loans exaggerated the applicant's income, and 54 of those loans inflated it by more than 50%.

Or consider this Chase loan officer's email acknowledging that he had made up an inflated income amount to make a borrower's debt-to-income ratio "work."

By 2007, the FBI reported that industry insiders -- loan officers, mortgage brokers, real estate agents, appraisers and lawyers -- not wannabe homeowners -- were involved in some 80% of mortgage fraud. The FBI calls that "fraud for profit" as opposed to "fraud for housing," which is when a homeowner lies to get a house he can't afford. As Calculated Risk's Tanta showed in 2007, that distinction started breaking down as the absence of underwriting by the banks enabled both types of fraudsters to join forces.

Tanta also explained that in addition to being directly complicit in mortgage fraud, lenders engaged in massive cost-cutting efforts that gutted their ability to underwrite loans:

So many of the business practices that help fraud succeed -- thinning backoffice staff, hiring untrained temps to replace retiring (and pricey) veterans, speeding up review processes, cutting back on due diligence sampling, accepting more and more copies, faxes, and phone calls instead of original ink-signed documents -- threw off so much money that no one wanted to believe that the eventual cost of the fraud would eat it all up, and possibly more.

Beyond the idea that the banks knew, in real time, that they were making loans that couldn't be repaid, evidence shows that banks went a step further and tried to conceal that information from others.

Banks Hid Fraud by Shopping for AAA Ratings

Banks weren't the only entities to stop evaluating risk. Their key allies were the big three ratings agencies, Moody's, Standard & Poor's and Fitch. The ratings agencies put AAA ratings on securities that didn't come close to deserving that golden grade, in part by using outdated risk models that their own analysts complained inflated ratings. But why weren't the agencies worried about their professional reputations?

In 2009, professor and former financial regulator William K. Black used a paper from S&P to discuss how the banks and the raters chose not to look at the documents used to make the loans they were securitizing. Then Black cited a 2007 paper from Fitch to show why it mattered that no one was looking at the loan files, why it was at minimum willful blindness. (Willful blindness is trying hard to not know that the law holds you accountable for knowing.)

What was going on? According to 2010 testimony from former ratings agency executives and their emails, the agencies capitulated to demands from banks for AAA ratings on mortgage-backed securities even though they knew those ratings weren't deserved.

The banks had the leverage to get the AAA ratings they wanted because rating "structured finance products" -- mortgage backed securities and the like -- had become really profitable for the ratings agencies, and compared to other types of rated securities, very few clients issued them. So if those clients -- the big banks -- weren't pleased, they could simply "ratings shop" -- that is, go from one agency to another until they got the desired rating.

In short, a large proportion of the foreclosures drowning the courts and the real estate market are a direct consequence of the banks' failure to effectively underwrite loans during the bubble. Those borrowers should have had -- and today would have had -- their loan applications rejected.

Servicers Get Paid to Foreclose, Not Modify

But wait, you might point out, it's not just the dodgy liar's loans going bust. Foreclosures have spread widely throughout the "prime" mortgage market as well. Surely, the Great Recession, not the banks, is to blame for many of those foreclosures.

You'd be only partly right.

What's generating many recession-induced foreclosures is the relatively new model of mortgage servicing. Prior to the mass securitization of mortgages, the bank that made a mortgage was the same bank that serviced it. As a result, the servicing bank made its money from the mortgage interest, and the long-term repayment of the mortgage was key to its profit. So, a bank was typically willing to work out a mortgage modification with the homeowner to keep that income stream intact.

Of course, sometimes the homeowner was in such trouble that foreclosure made more sense. Foreclosures do happen even in real estate markets filled only with solidly underwritten loans serviced by the bank that made the loan. That's because bad things do happen to prevent a once-creditworthy borrower from repaying.

How many forecloses result from financial incentive and how many from incompetence isn't clear, but it's also irrelevant. The point is that a good chunk of foreclosures shouldn't happen because modifications make more money for the people the mortgage is owed to (usually, the investors in the mortgage-backed securities).

Simply put, if the banks had kept up normal underwriting and had modified mortgages (or approved more short sales) every time it made sense to do so, we wouldn't have the foreclosure volume, and thus delays, that we currently face.

The "Paperwork" Problems Aren't Meaningless

Now you might ask, in addition to volume-related delays, with so many foreclosures in the system, aren't defaulted homeowners to blame for gumming up the process? Aren't they just citing meaningless problems with the banks' paperwork so that they can stay in their homes for free, hurting everyone else in the process?

No.

While it's true that foreclosure defense attorneys want to slow the process to give their clients more time to relocate, that doesn't mean the "paperwork" problems they're raising are meaningless.

For example, the banks' carelessness with the securitization of Massachusetts mortgages has clouded the title to thousands of properties. Foreclosure attorneys' use of nonlawyers in Pennsylvania may have clouded the title to thousands more. The use of a private, electronic database (called MERS) to track mortgages instead of recording them in government land records may have clouded yet millions more. And in any case, MERS is a legally problematic cost-savings strategy that has created only more confusion and delay.

Even homeowners who are capable of curing their default sometimes can't because banks' inaccurate record-keeping about how much the homeowners owe precludes the possibility. More outlandish problems have surfaced too: from multiple banks trying to foreclose on the same property, to banks foreclosing on homes bought with cash, to banks breaking into homes they haven't foreclosed on, to a bank ignoring its court-approved agreement to foreclose and demanding the money instead.

What Revelations Are Still to Come?

These cases are probably just the leading edge of a paperwork-problem tsunami. Even though these issues have been in the news for months, the official investigations and litigation are still in relatively early stages. Millions of foreclosures in nonjudicial states haven't gotten the scrutiny they deserve (except presumably as part of the 50-state attorneys general investigation), so who knows what will yet surface?

As major judiciaries force a closer look at bank documents, what will they find? The fact that all the major law firms advising on "typical" securitization deals didn't know that "assignments in blank" violated Massachusetts law is chilling. How many other states' laws were broken by the "typical" deal?

Moreover, everything we're seeing suggests the banks' papers for securitized loans are in total disarray. The note is in one place (theoretically), the record of payments on the loan (inaccurate as it may be) is in another, and the ownership of both the note and the mortgage may or may not be the same. When asked to produce securitization documents, banks frequently submit drafts and contracts without attachments. The attorneys doing the foreclosures are buried in volume, cutting corners themselves, and are unable to meaningfully communicate with their bank clients. Indeed, it may not even be attorneys doing the foreclosures.

Signs of this chaos abound, whether it's dead financial firms signing documents, banks changing their minds about who owns the loan in the middle of court proceedings, or attorneys unable to certify that the information in foreclosure complaints is true.

And What's the Fate of Mortgage-Backed Securities?

The banks also have a different type of mortgage "paperwork problem" relating to mortgage-backed securities. Will the banks discover that millions of mortgages they thought they had securitized instead stayed with them because they screwed up the paperwork to transfer the mortgages?

Massachusetts will be a leading indicator on that question because the "assignment in blank" problem may have prevented most of those Massachusetts mortgages from being securitized. Or if the securitizations technically succeeded, will investors still win suits against the banks or force them to buy back large volumes of securities because the papers the banks used to sell the securities were fraudulent?

The foreclosure paperwork problem damage the banks somewhat and the broader economy even more so, but the paperwork problem with mortgage-backed securities has the potential to trigger Bank Bailout II.

No One Is Above the Law

But imagine for a second a world that doesn't exist -- one in which the banks' foreclosure documents were all accurate, and their problems were simply a failure to abide by the rules that apply to everybody else? Shouldn't we blame the deadbeats for gumming up the system then? Many readers make comments to that effect on some of my reporting.

Let's flip the question: Why is it OK for the banks to ignore the rules? The rich and powerful and the ordinary Joe are all supposed to play by the same rules. No one is supposed to be above the law.

No matter whether it's America's real estate market getting crushed by millions of foreclosures that didn't need to be, or our real property records getting shredded through clouded titles, or citizens' tax dollars being used to bail out banks again, we're all paying for the banks "paperwork" problems.

And remember: We don't know yet just how big that bill is ultimately going to be.

See full article from DailyFinance: http://srph.it/hiNPXS

Here is a link that might be useful: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners


Follow-Up Postings:

 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

This is a nice article summing up the irresponsible underwriting practices at the heart of the meltdown of the mortgage industry. It's not new though. Many people saw it coming and even profited by it.

Read The Big Short by Michael Lewis.

Here is a link that might be useful: Except from The Big Short


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"Shouldn't we blame the deadbeats for gumming up the system then? Many readers make comments to that effect on some of my reporting.

Let's flip the question: Why is it OK for the BANKS to ignore the rules?"

Excellent point. Always good to blame the sheep for allowing themselves to be eaten by all knowing wolves.

Thanks for posting this Logic. Though I doubt it will change the minds of those who are firmly convinced that all the banks are right.

Even when they break down the doors of people who never even HAD a mortgage them (the invading bank) in the first place.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

Well, there are a hundred million or so mortgages in the system and we've got evidence that 20 or so people have been foreclosed on in error. (not just sloppy paper work, but foreclosing on the wrong house or on someone who had been making payments) That is 0.000002%.

I don't think I've heard anyone saying that banks are lovable creatures with your best interests at heart. What I object to is that people are claiming that banks are completely incompetent AND at the same time "all knowing wolves" hatching plans to destroy the country. These mega-banks just don't have it together enough to hatch diabolical plans. They really are as dumb as they appear.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

The crisis is not the few "foreclosed on in error" but the much larger number of loans made by banks knowing they could sell them off and walk away.

The lower documentation loans started with folks with very large down payments.
I have used them many times, always with at least 30% down, and sometimes more.

They became the 'liars loans' when the large down payments were no longer the entry point to the process.

The interest only loans started out for wealthy investors who would rather keep their money in the markets working (and at the time earning well more than the rate on their mortgage).
If I am making 15-20% on my investments, why would I want to tie money up in paying down a mortgage?
If the market starts to turn you make payments then.

It was turned into a way to purchase a house that a buyer could not afford any other way.
They did not have the assets behind them if anything went wrong.

You had a flood of folks deciding to own rental properties with no experience, and no assets to back them up.
A short vacancy and they are in trouble on their 95% financed rental property.

I have already picked up a few of these after they became REO (and at a very good price).
I have always put enough down on rentals to make SURE the rent covered the mortgage, with some additional funds for repairs and problems).

A whole lot of people played musical chairs thinking they could always sell for more than they paid.
The music stopped and they now cannot afford their payments.
They are over-leveraged, with no other assets to even try and fall back on.

Countrywide made a real killing in this market, making huge numbers of lower quality loans and then selling them off.
They pocketed profits and left the fallout to whomever ended up owning the loans.
By allowing the same entity to both originate the loans and then package them into bonds in the secondary market short cuts occurred.

Now with MERS even the ownership of some notes is on doubt.
Is the deed of re-conveyance or a mortgage satisfaction going to be correct and valid?
Or have they just managed to cloud the titles of thousands of piece of property?

If you cannot prove you own the note, what value is your certificate of satisfaction?


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

Trying to assign "proportional" blame (90% vs 10% etc. ad silliness) is futile.

Any borrower who lied about any of their facts in application for a loan is 100% responsible. Any lender who knowingly accepted & funded that fraudulent application is equally 100% responsible (yes... both are 100% responsible... neither get a pass of ANY proportion.)

If the indsutry drifted toward mroe & more tolerant underwriting... and if we deem THAT to be the demon (which I think is reasonable,) then we really have to look further upstream to how that "stretching the guidelines" trend got started.

Wall Street eventually blew the doors off of it... but before Wall Street even started dreaming of off-hedging risks on circuitous derivatives, the Federal Government started forcing the industry to make loans to borrowers who would otherwise not qualify, at rates & terms they would not otherwise be offered... all in the name of good intentions.

The seed of the meltdown was rooted in such non-market "good intentioned" manipulation. Everything developed from that.

"Equal opportunity" regulation is an appropriate role for governmnet. "Forced equalization of results" against normal economic process by government directly participating rather than simply refereeing is not.

If we don't learn this (and so far it is very clear our politicians have not,) we are doubtlessly doomed to repeat it, in ever growing volatility swings.

Dave Donhoff
Leverage Planner


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"Equal opportunity" regulation is an appropriate role for governmnet. "Forced equalization of results" against normal economic process by government directly participating rather than simply refereeing is not."

The push to get everyone to be a homeowner lies at the root of much of the mess.

Some folks simply do NOT have what it takes.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

Give the Federal Reserve credit for its part in keeping interest rates low and "liquidity" high. Even its defenders--leave aside the key bubble-blower Greenspan--grudgingly concede partial blame.

That the constellation of D.C. centric journalists, mega corporations and 42,000 lobbyists--all parasitical and dependent-- have convinced the public that the evil banker conspiracy is the source of their woes is a measure of their power. The bloated denizens of that bit of recovered swamplands on the Potomac get full due.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"the Federal Government started forcing the industry to make loans to borrowers who would otherwise not qualify, at rates & terms they would not otherwise be offered... all in the name of good intentions."

I have heard that accusation many times. Very little proof to back it up. A typical right-wing talking point.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

""the Federal Government started forcing the industry to make loans to borrowers who would otherwise not qualify, at rates & terms they would not otherwise be offered... all in the name of good intentions."

I have heard that accusation many times. Very little proof to back it up. A typical right-wing talking point."

All you have to do is look at all the lawsuits and threats made against banks for not lending.

Obongo sued a Chicago bank that was not making enough loans in some neighborhoods to satisfy the group he worked for.

Barny Frank has repeatedly leaned on Freddie and Fanny to make loans to "under-served" markets.
The underwriting standards were lowered in response, making the 'Alt-A' loans eligible for purchase by the GSEs.

It started under BushI and gained steam from there.

Lower and lower down payments, and lower and lower underwriting standards, and a place to dump the loans (if they did not issue their own bonds).


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

In all the above one thing is never brought out and it does happen more than people want to admit. Real Estate Agents showing the houses, should not PUSH couples, families etc into houses they either do not want, or cannot afford. All they can think of is the commissions. I have personally seen it over and over. If I were to look at houses, I would tell the agent/broker this is how much I can spend, and I cannot afford the payments over $$$. the next thing I would here is well it is just a little bit over, and look at the granite tile, crown molding, just repaint$$$, just put in new carpet$$ etc Can you borrow from someone etc. This problem must be factored into blame too. My relative in RE does it a lot and admits it, with the comment, if I don't another agent will take my sale.. Yes not all do it, but too many do. By the way, where she sells in Stockton, she sold a older home, 900# square foot, no garage, for over 400,000.00 That is a bunch of @@@@. That house is not even worth 90,000.00 and in a bad neighborhood. Yes I am familiar with the area. It is happening here in ND because of the oil boom. Houses that sold for about 80,000.00 just about 3 years ago are not going for over 300,000.00, and they are still worth the original price.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

RE agents sell on commission, so they (like car salespeople, insurance salespeople, jewelry salespeople, ...) have every incentive to "sell up" as much as they can without losing the sale. Commission sales have been that way for about forever.

Given that history, the buyer then is responsible for deciding for themselves what they like, what they're willing to compromise on, and how much they want to pay. No one -- sales reps in particular -- should have a final decision on what someone else buys. IMHO anyone who is "coerced" into buying something expensive that they didn't want probably shouldn't have been handling that much money in the first place.

As a cause of the RE bust, I think this "coercion" is a non-starter. People bought because almost every facet of American tax law favors mortgagees over renters or even over those who own their homes free and clear. They bought because they saw a market in which waiting meant paying significantly more later. They bought because, for years, houses were easy to sell and the amazing proceeds could vault you right into the next "better" house -- or the house became a huge ATM, financing luxurious cars, boats, vacations, etc.

And, finally, there were those lending the money who either fell asleep at the switch or abandoned it entirely to participate in this orgy of money. There's a reason many mortgages were called "liar's loans". And lenders failed to do their duty to protect themselves from marginal borrowers or sour economies.

Certainly there were people who abused the system. Certainly there were RE agents who tried hard to keep buyers up with the Joneses. Certainly there were buyers who wanted to be the Joneses. But the one with the money calls the tune. And, in this case, many people were just tossing their money at the band.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

So real estate agents were behind the housing bust? What special steroids were they taking, I wonder, that suddenly gave them such extraordinary power to "force" sales and prices up that hitherto had been absent? Were they taking more Tony Robbins courses? Coked up more than usual? (Caffeine, of course.)

Um, how about easy money, lower underwriting standards and a deliberately unregulated derivatives market, all under the aegis of the federal Leviathan, its myriad agencies and its monstrous children, Freddie and Fannie?

"Affordable housing" for all was the mantra, costs be damned. How ironic that now that housing is more affordable, the same incompetents want to drive housing prices up and manage everything in their subject's lives. "Affordable healthcare" for all has a familiar ring to it.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

Back to the main issue...the original sub-prime loans comprised less than 10% of all US mortgages. Even if every single one defaulted...which they did not...that still would have been a mere blip on the economy.

The problem for the economy was Wall Street leveraging those worthless loans 40 to one and more...making it very lucrative for the lenders to keep on lending to anyone who could fog a mirror...then selling the same loan over and over again...all the while knowing they were peddling worthless junk.

As far as banks being "forced" to give mortgages to those who could not afford them, perhaps there were a few law suits here and there...but even as millions upon millions in fines that the banks collectivley have been required to pay for all sorts of transaction fraud etc, that has not stopped them from continuing in the same vein. Therefore, I think it is without foundation to blame a few "lawsuits" as the incentive for their actions.

The bottom line is they found a way to make collective trillions by over leveraging and fraudulently selling worthless junk...and THAT was their incentive to continue to do so...not a handful of lawsuits.

That said, I'm still waiting for someone to quote a link to the section in the Community Reinvestment Act that backs up the claim that the government forced the banks to lend money to those who could not afford to re-pay.

Since when can the government force the banks to do anything that they don't want to do? The banks just do what they want, pay the fine...and continue business as usual.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"Therefore, I think it is without foundation to blame a few "lawsuits" as the incentive for their actions. "

It is not just the lawsuits, but the pressure by the congress-critters on the GSEs to purchase the loans with lowered underwriting standards.

There is a reason the GSEs are taking a bath now.
The GSEs hold a larger share of the lousy paper, so comparing them to "all US mortgages" is not accurate.

The GSEs would purchase any 'conforming' mortgage, and the conforming underwriting standards have been driven lower and lower to make loons to the "under-served" market (folks with poor credit, no credit, etc.).

Every administration has been pushing this for at least 20+ years.
It supports the builders, the lenders, the RE agents, etc.

The government can easily force banks to doi things they do not want to do.
Under the Community Reinvestment Act the bank must demonstrate it is doing 'good' and providing needed services or risk having there charter yanked (and if they have 'first,' 'federal,' or N.A. (National Association) they are federally chartered banks).

So make sure you make all those loans, and the GSEs will purchase them from you leaving the bank off the hook.

Outright fraud is difficult to prove in court, especially when the borrower is part of the fraud.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"Outright fraud is difficult to prove in court, especially when the borrower is part of the fraud."

Actually, that IS the problem..there is no way to tell if the buyer committed fraud...or if the lender altered the numbers in terms of income etc to assure the buyer would get the loan...thanks to the fact that the lions share of the mortgage documents were never verified for truth and/or accuracy.

"The GSEs hold a larger share of the lousy paper, so comparing them to "all US mortgages" is not accurate."

That has been true now for quite some time......however, at the outset of the bubble burst, literally less than 10 % of all mortgages in the US were sub-prime.

The only reason that those mortgages now hold a larger share of the lousy paper is because each and every one of those worthless mortgages were leveraged forty to one and more. In addition, each and every one of those worthless mortgages were sold over and over and over again....which is why the defaults were so problematic.

Last but not least, the better explanation is that the banks were given HUGE financial incentive to loan to those who could not pay. That is not force...that is a BRIBE.

The link below is an excellent resource on this issue.

Here is a link that might be useful: SOLD OUT - How Wall Street and Washington Betrayed America


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

I would love to see documentation for virtually every opinion sentence included above.

Could you please refer me to sources for:

1. "thanks to the fact that the lions share of the mortgage documents were never verified for truth and/or accuracy."

2. "That has been true now for quite some time......however, at the outset of the bubble burst, literally less than 10 % of all mortgages in the US were sub-prime. " - what year is the OUTSET?

3. "The only reason that those mortgages now hold a larger share of the lousy paper is because each and every one of those worthless mortgages were leveraged forty to one and more."

4. " Last but not least, the better explanation is that the banks were given HUGE financial incentive to loan to those who could not pay. That is not force...that is a BRIBE."

And lastly, why is the document you linked to such an "excellent" resource?


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

1) "Automated underwriting" was used in as much as 40% of sub-prime loans. And this was in combination with such willfully blind "innovations" as NINA (No income, no assets), SIVA (stated income, verifiable assets), NIVA (no income, verified assets) and NINJA (no income no job) loan applications. As many as 43% of mortgage loans were made to "buyers" with no down payments.

But not to worry! Fannie and Freddie guaranteed them and the originating institutions packaged them and sold them off.

We should give credit also to ARM (adjustable rate mortgages) marketed with teaser low rates and interest only payments. These accounted for 80% of sub-prime loans. As rates rose and amortization kicked in, many buyers were hard-pressed. With nothing at stake, there was and is little incentive to soldier on. Non-recourse mortgage loans in 19 states and D.C. make it easy to walk away. By 2006, sub-prime mortgages based on these shaky covenants accounted for one in five new mortgages.

The other points are as easily verified. If you have doubts about any of them or alternative explanations, we would be interested in seeing your sources.

I live in one of the few advanced countries to have been relatively unaffected by the bust. Here are some informed ideas why there has been no housing bust in Canada. These are lessons that I'm sure will not be learned by politicians who think promising the right to cheap goods and services comes with no cost that can't be placed on future generations. Until they revolt and default on the debt run up by their ancestors.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

The buyer has some responsibility. They should have considered their ability to repay. All the blame cannot be shifted to others.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

Many people saw it coming and even profited by it.

Very few put their money behind their contrary views. Otherwise, their rewards would not have been so huge.

The most prominent was hedge fund manager John Paulson, who doubled his net worth in a year personally raking in $3.7 billion by betting against housing in 2007. His Credit Opportunities Fund gained 590%.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

bus driver: "The buyer has some responsibility. They should have considered their ability to repay. All the blame cannot be shifted to others."

The blame for losing their homes...yes...for many....but not all.

However, the blame for the implosion of the global economy was and is solely the fault of the finance sector.

If it was not gullible home buyers, it would have been something else...as Wall Street can't begin to make even a quarter of the money that they make without shorting losses that they purposely create and speculation that drives up the price of everything it touches.

Why do you think they tried so hard to get their greedy little hands on social security?


 o
Documentation

Patser...start by documenting your opinions...and provide factual back up as to why your documentation is the only true source, and we'll take it from there.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

IMO, this is yesterday's news...in terms of what actually happened.

However, it does at least shine a light on the absurd party line of the finance profession...that a handful of uneducated home-buyers torpedoed the global economy.

Got to hand it to Wall Street...they are indeed the masters of the con...selling snow to Eskimos would be a piece of cake for them.

Even after all we have learned over the last two years...I still hear people perpetuating the Wall Street sponsored urban legend by repeating the mantra..it was because people borrowed against their house to buy flat screen TV's and big SUV's, etc.!


Excerpt form findings of the Financial Crisis Inquiry Commission:

"WASHINGTON The 2008 financial crisis was an "avoidable" disaster caused by widespread failures in government regulation, corporate mismanagement and heedless risk-taking by Wall Street, according to the conclusions of a federal inquiry.

The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

"The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done," the panel wrote in the reports conclusions, which were read by The New York Times. "If we accept this notion, it will happen again."

...It also criticizes the Bush administrations "inconsistent response" to the crisis allowing Lehman Brothers to collapse in September 2008 after earlier bailing out another bank, Bear Stearns, with Fed help as having "added to the uncertainty and panic in the financial markets."

Like Mr. Bernanke, Mr. Bushs Treasury secretary, Henry M. Paulson Jr., predicted in 2007 - wrongly, it turned out -
that the subprime collapse would be contained, the report notes.

Democrats also come under fire. The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clintons term, is called "a key turning point in the march toward the financial crisis."

The report does knock down at least partly several early theories for the financial crisis. It says the low interest rates brought about by the Fed after the 2001 recession; Fannie Mae and Freddie Mac, the mortgage finance giants; and the "aggressive home ownership goals" set by the government as part of a "philosophy of opportunity" were not major culprits.

On the other hand, the report is harsh on regulators. It finds that the Securities and Exchange Commission failed to require big banks to hold more capital to cushion potential losses and halt risky practices, and that the Fed "neglected its mission."
Though the report documents questionable practices by mortgage lenders and careless betting by banks, one striking finding is its portrayal of incompetence.


It quotes Citigroup executives conceding that they paid little attention to mortgage-related risks. Executives at the American International Group were found to have been blind to its $79 billion exposure to credit-default swaps, a kind of insurance that was sold to investors seeking protection against a drop in the value of securities backed by home loans. At Merrill Lynch, managers were surprised when seemingly secure mortgage investments suddenly suffered huge losses.

Speculative binge
By one measure, for about every $40 in assets, the nations five largest investment banks had only $1 in capital to cover losses, meaning that a 3 percent drop in asset values could have wiped out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant "shadow banking system" in which the banks relied heavily on short-term debt."

Here is a link that might be useful: Panel's 576-page report accuses several financial institutions of greed, ineptitude


 o
One more point...

The banks/Wall Street et al clearly acted in their own best interests... ignoring the gargantuan risks...accidentally..on purpose..or both.

Whether one believes that they were unaware of the consequneces or ignoring the facts, they went to extreme measures to hide the truth...which pretty much negates the "unaware" argument.

Therefore the question remains the same.

Why would anyone with a modicum of a working brain in their head be willing to trust these greedy morally bankrupt sociopaths with our economy?

Answer..because regardless of WHY they did what they did...they made BILLIONS...for themselves, and those who have the power to allow them to continue. And THEY call the shots.

The rest is just collateral damage.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"By one measure, for about every $40 in assets, the nations five largest investment banks had only $1 in capital to cover losses,"

And the normal cash reserve is 10%.

Depending on what the "assets" are, they ARE capitol.

A loan made to someone is an asset to the bank, not a debt.
It can become 'non-performing' and could no longer be carried as an asset for reserve requirements, but it would only become a debt if the value of the collateral fell below the amount of theloan AND the loan is no longer 'performing.'

Fractional reserve banking is how banks make money.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"Fractional reserve banking is how banks make money."

However, it should not be exploited to the point where it decimates the global economy.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

I have one question: I remember hearing or reading that it was our past presidents, maybe Clinton or Bush that encouraged banks to give out these types of loans. The goal was to make housing available to anybody. Is there any truth in this? Appreciate anyone's response to this.
Thank you,


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

I'd like to recap the "blame game."

First, the federal government: The Clinton administration, enthusiastically followed by the Bush administration, supported "easy money" credit policies that opened up mortgage giants Fannie Mae and Freddie Mac to their version of subprime lending, known as "Alt-A" loans. These administrations wanted to increase homeownership in America.

Second, Wall Street, Fannie Mae and Freddie Mac: During the housing boom, Fannie and Freddie, along with Wall Street finance companies, loved the subprime market. They gobbled up high-yielding subprime loans like a child does candy, assuming property values would always rise and therefore minimize defaults.

Third, mortgage originators, including lenders, bankers and brokers: These folks were in charge of loan production. This meant Fannie, Freddie and Wall Street could receive their yields, and the federal government could tout more homeownership. Not all, but many of these originators solicited loans that were not in the consumers' best interest.

Last, the American consumer: I'm a firm believer in personal responsibility. Just because a lender is willing to lend a consumer a million dollars, does that mean the consumer should take the loan? The consumer bears much of the responsibility of this mess by taking a mortgage in excess of what he can afford.

Here is a link that might be useful: Spreading the blame for a mess


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"I'm a firm believer in personal responsibility. Just because a lender is willing to lend a consumer a million dollars, does that mean the consumer should take the loan? The consumer bears much of the responsibility of this mess by taking a mortgage in excess of what he can afford."

I cannot agree more.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

Three different problems:

1. Foreclosure crisis: Borrowers are responsible for taking on loans they couldn't pay back. In cases where the lending institution knew this and was complicit, or misrepresented the terms of the mortgage, the lending institution also bears responsibility.

2. Global financial crisis: Fully the responsibility of the banks, ratings institutions, insurance companies and overeager investors. Nothing to do with homeowners at all. The institutions had a responsibility to perform due diligence and failed to properly assess the risk, and the government failed to provide adequate oversight and regulation.

3. Foreclosure legal complication crisis: Fully the responsibility of the institutions who were throwing mortgages around like pancakes. Nothing to do with homeowners at all.

How anyone can blame homeowners (or policies promoting home ownership) for numbers 2 and 3 is beyond me. The government is responsible for inadequate regulation and is even now being lobbied to do away with the inadequate fix that was enacted last year. But by huge, overwhelmingly ratios, responsibility for the greatest part of the crisis and the ensuing recession rests on the shoulders of the financial sector that chose to gamble blindly and wants to do it again.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

Here is some interesting reading:

Here is a link that might be useful: Financial Regulation Timeline


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

The opinion piece that berniek copied and pasted from the Washington Times (the Moonie newspaper) doesn't even mention a major culprit in the whole fiasco -- the bond ratings agencies, namely Moody's, Fitch's and Standard&Poor -- who gave higher ratings to the securities containing the toxic mortgages than they should have gotten. They did this because the financial institutions issuing the mortgage securities pay the agencies to do the ratings, and each rating agency was reluctant to rate the securities accurately for fear they would lose future business from the issuers to their rivals.

In other words, the rating agencies duped the investors (many of them institutional investors such as pension funds) who bought these overrated securities into thinking they were less risky than they really were. The agencies made money from the issuers, the issuers made scads of money selling these stinkers to the investors, and the investors lost their shirts. Thus, the investing public found itself betrayed by the very agencies that it relies on for accurate, "objective" assessment of risk.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

How about your local taxing authority? My property taxes have increased $300 a month since we moved in in 2007. When I signed my mortgage papers back then, I signed up for $1500 a month on a $204,000 home.

Now it's at $1894 per month because they have assessed my home at $237,500. Thats over $37,000 more than any house on my block! If it goes any higher we may have to sell or default. No ones going to buy our house for $237,000. We don't even have granite countertops.

We lost our first appeal. The next appeal is Olympia. So we're basically fighting against the people who we pay wages to. How unbiased is that? We may have to sell, but who is going to buy a house for $204,000 that they have to pay $237,000 in assessed value?


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

goodbyekitty -- how much are your taxes/year? Sorry to hear of your difficulty, it is very unfair. Are other homes not being reassessed too? On what grounds did you lose your appeal?

I had the same problem when we bought our house for $270,000 in 2005, and it was assessed for tax purposes at $300,000. They said there's a +/-10% variable allowed, so too bad for us. It's now assessed at $333,000, and I have had an agent give me a realistic selling value of $320,000. At least the assessment value is getting closer!


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

Our tax assessor has to prove how he comes up with the market value of the assessed property. See his statement below. Yours should be able to show you the comps used.

"The individual homeowner may ensure the accuracy of their property inventory (i.e., correct number of bedrooms, bathrooms, etc.) thereby lessening the need (in many cases) for an on-site inspection by Assessor personnel. An on-line "Sales Comparison" listing allows the taxpayer to view other properties similar to their own that have sold. This feature enables the owner to compare the market value placed on their property, for ad valorem taxation purposes, to the value placed on similar properties, ensuring a fair and equitable valuation."


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

Otta, looks like it's close to $3000 a year for taxes. We were all assessed at the same time but everyone's property values are all around $190,000 to 205,000. But ours sticks out like a sore thumb at $237,500.

They said our proof wasn't convincing enough. Yeah, and I heard him say they had an allowable varience of 10%. Crazy!

When we told them we couldn't sell our house for $237,000, they're response was "How do you know that?" I should have said "Well, come out and look at it. Would you buy it for $237,000?" No way! It sat vacant for 2 years. One of our neighbors put in a bid for it once but the owners wanted too much for it. I started noticing it when it was on the market for $217,000. Finally one day it was reduced to $204,500 and we jumped on it. We told them all of this. But it wasn't enough proof that it wouldn't sell for $237,000 even tho' it sat for 2 years empty until it came down in price.

When we go to Olympia we are going to get some letters from realtors on what their opinions are. I don't know if I'm being overly sensitive, bu I just feel like we're being robbed.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

And just like BofA they will cut a deal for penalty that is a fraction of the actual costs & damages, obtain immunity form further legal proprietorial action, and wander off into the sunset with very fat pockets.

BofA welcomed their penalty.

Knowing it was a small fraction of the liability they faced if the cases went to court.

The government failed to even assess the size of the liability when negotiating the settlement.

Gotta keep 'to big to fail' fat, happy, and profitable.

The hell who who ends up paying the bill.

Mortgages lenders have relied on VERY low default rates to be profitable long term.

Fractions of a single percent.

When the numbers increase to even 1%, it as a VERY large increase.

The 'sure thing' (after all, who wants to loose their house) becomes a risky investment.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"Of course, both banks and mortgage lenders are responsible for the mortgage."

Who do you think ought to be responsible for this?

Detroit homeowner forced to share place with squatter
By Erik Ortiz-New York Daily News
October 11, 2012

"Heidi Peterson says she returned to her house after living away for a year to find an uninvited houseguest, Missionary-Tracey Elaine Blair. The squatter says it was abandoned, and now Peterson must go through the courts before she can evict the woman."

A link that might be useful:
www.nydailynews.com/news/national/detroit-homeowner-forced-share-place-squatter-article-1.1180705


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"Detroit homeowner forced to share place with squatter"

Sounds like she really needs a more aggressive attorney.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"Detroit homeowner forced to share place with squatter"
Sounds like she really needs a more aggressive attorney."

Ok, she needs a good attorney, but WHOSE fault is this?


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"Ok, she needs a good attorney, but WHOSE fault is this?"

What does fault have to do with it?

Beyond breaking and entering into someone's house, a matter for the local DA.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

Berniek is right: Much of the blame here falls upon the shoulders of the politicians (led by then-President Clinton), who forced banks to begin some rather foolish lending practices. Alan Greenspan certainly did his share to push this concept of "everyone can borrow" during his time as Fed chairman. Between creative financing, no money down offers, and other such options, the government has given people plenty of rope with which to hang themselves. We Americans haven't proven ourselves to be particularly strong in the moderation and self-discipline categories over the last 30-40 years.

Also, remember the climate that existed in the 90s, when I bought my first house: Spurred on by the soaring housing prices, people were convinced that buying "as much house as you can afford" was a good move. Housing was considered an investment that couldn't fail. Yes, the experts began preaching about "the housing bubble" long before it hit, but the masses couldn't grasp how this sure-thing could ever fall.

And there's always been a (faulty) basic belief that "If I couldn't afford it, the bank wouldn't lend it to me." I fully agree with those who say that Real Estate agents will push buyers to their upper limits and beyond, and banks will lend what they can -- it's all about profits for them.

Yet, the home owner DOES also bear the brunt of personal responsibility. After all, who cares most about whether I can afford my mortgage -- and still buy groceries and other things I need? Clearly, it's ME! I reap the rewards or punishments of my decisions, so I should do the math and know whether I can comfortably afford a house (or anything else) before I buy it.

However, we've sort of left that thinking behind in today's buy-now-pay-later society. We're constantly told that "we deserve" this or that thing. That if we're going to finance it, we deserve to have exactly what we want. That "everyone" has debt. We've got to get past that.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"Housing was considered an investment that couldn't fail.

Only among the naive and foolish looking to make a fast buck.

As usual, they crashed and burned.

Leaving out old slow guys to pick up some nice pieces at bargain proves.

A feel a little sorry for some of the older folks who though they had finally found their gold mine in the old family home.

Only to have the deal unravel around them leaving them with less than I had offered in the first place.

I got my fair share of call backs trying to resurrect month old offers long since dead.
The offers had been OBE since I had already invested the funds with sellers with a little less greed in their eyes.

I have always tried to be fair with older sellers that need some money out, but recognize that they have lets their houses go down hill in maintenance, style, & redecoration.

The community of buyers looking for 'project houses' seems to have greatly contracted.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

I ventured into this thread with some trepidation - being quite burnt out on politics - still - I couldnt resist.

In answer to the subject heading: let's be honest, it's ALL OF THE ABOVE. Yes it is accurate to say that the mess is bipartisan. But the banks were "forced" to accept deregulation? Please, give me a break. They would not have gone along with subprime had it not been insanely profitable to do so - once the firewalls were removed between investment and lending they were free to pour it all into Wall St. roulette - figuring the losses from loans gone bad would be only a small price to pay - the real money was to be made off the investments.

It worked fine until it didn't. Then it all came crashing down. Hurting lots of innocent people in the process I might add.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

" But the banks were "forced" to accept deregulation?"

The banks were forced to serve 'undeserved populations' under threat of having their Federal charters revoked for 'not serving the public interest.'

The repeal of Glass�Steagall just let them spread the contagion around more with bank issued bonds backed by crappy notes that Wall Street wanted to up their yields.

At least the feds are going after BofA as a successor to Countrywide.

BofA though they had bought their way out, but civil actions are proceeding.

The agreement must have only covered criminal charges.


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

Forced - uh huh. Like I was "forced" to take that second piece of chocolate cheesecake after dinner last night. You know you shouldn't, but...


 o
RE: Who's to Blame for the Mortgage Mess? Banks, Not Homeowners

"The banks were forced to serve 'undeserved populations' under threat of having their Federal charters revoked for 'not serving the public interest.'".

Which banks were out of business because of "having their Federal chargers revoked for NOT serving underserved populations"?


 o Post a Follow-Up

Please Note: Only registered members are able to post messages to this forum.

    If you are a member, please log in.

    If you aren't yet a member, join now!


Return to the Buying and Selling Homes Forum

Information about Posting

  • You must be logged in to post a message. Once you are logged in, a posting window will appear at the bottom of the messages. If you are not a member, please register for an account.
  • Posting is a two-step process. Once you have composed your message, you will be taken to the preview page. You will then have a chance to review your post, make changes and upload photos.
  • After posting your message, you may need to refresh the forum page in order to see it.
  • Before posting copyrighted material, please read about Copyright and Fair Use.
  • We have a strict no-advertising policy!
  • If you would like to practice posting or uploading photos, please visit our Test forum.
  • If you need assistance, please Contact Us and we will be happy to help.


Learn more about in-text links on this page here