Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Here's the part I don't get, and please help me understand this, because I can follow the logic in this scam only till it hits Wall Street...I understand how the loans get pooled and investors get involved.  What I don't understand is do the "banks" or servicers actually want the houses back, especially with housing prices in a slump, or what?  Wouldn't it be a potential loss to take the homes back?  This is so complicated and I am trying to follow the chain of how and why this is happening, I understand the bottom line is probably the most important thing to these people, so if foreclosing is a costly prospect for banks, why are they so intent on doing it?  My husband and I have been scratching our heads on this one.

Insight anyone?
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srsd

Don`t believe everything you read.....think about this.....If you have had a mortgage for 5-10-15 years and paying interest, the companies are making some money on the interest and other bogus charges.....now let`s say you are foreclosed on...the company takes the house and sells the house for any $ they want to sell it for...They have everything you have already paid ,plus what they sell the house for....how can they lose money??

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Ohio
Scratching here too April

Money is being made somewhere...we would not be seeing the fabricated defaults and repayment plans that are purposely designed to fail.

It's almost like the servicers are saying screw you to everybody..the borrowers, the investors...we're going to make these loans non-performing so we can reap all this post default income and not have to send you wall street jerks another dime. Once we are through fleecing the borrower then we are going after you to reimburse us for our "expenses" in kicking the poor bastards out of their homes. That will enable us to a money Judgment AND reimbursement AND the property AND the suspense account money we managed to keep secret. life is beautiful!

We will just blame it on the deadbeats who don't pay their mortgage payments
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I did read somewhere, too, (probably an article linked from this site) that if they hold onto the house awhile, they don't have to report it as a loss.  That sounds like an attempt at keeping under the government's radar.

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April:

You ask an EXCELLENT question!  The SHORT ANSWER is that mortgage investors RARELY if ever want the house, NOR ar they generally INTERESTED in foreclosure.  There ARE exceptions as in mortgage investors who are BOTTOM FISHING, BUY delinquent or default mortgage loans at a DISCOUNT and then profitting by recovering the full face amount at foreclosure.

Traditionally, default and foreclosure was a NIGHTMARE for financial institutions.  And this was something to be avoided.

One of the consequences of the securitization of mortgages is the division of responsibilities and fractionalization of various interests.  The originator typically SELLS virtually ALL mortgage production to secondary mortgage market investors within sixty days of closing.  Very often originators sell the servicing rights to the mortgage, as well.  The originators therefore make their money on the original loan fees and markup received on teh mortgage production and servicing rights they sell.

ONLY under the circumstances that there was undetected FRAUD in the original mortgage application OR a default within the first six months will the originator find itself INVOLVED in the foreclosure, and this only through teh required REPURCHASE of the mortgage loan.

The loans are in turn sold or traded to FNMA and/or FHLMC or a private conduit.  Or larger mortgage concerns will aggregate the mortgages and securitize them themselves on Wall Street.  FNMA and FHLMC fund their purchases with the issuance of mortgage backed securities (MBS).

These various entitites make profits on mortgage sales and trading as well as guarntee fees.

The Wall Street investment banking concerns make investment banking fees, brokerage fees and commissions for structuring and selling the MBS deals.

By and large, the risk then is assigned to the PURCHASERS of various MBS issues.  And great creativity and ingenuity in crafting and engineering these securities makes it VERY DIFFICULT to the average person to follow and understand.  It is rather clear that some very senior Wall Street executives FAILED to fully UNDERSTAND and properly DISCLOSE the risks they retained in holding certain of these securities in portfolio!  And rating agencies seem to have gotten it WRONG, as well.   

In the end, it is the owners of the beneficial interests in the MBS issues that are truly at risk.  And Wall Street has laid off this toxic paper globally.  Some of it is probably sitting in YOUR state and municipalities retirement funds.  More is held by various foreign investors.

But the MBS trusts typically have NO EMPLOYEES.  EVERYTHING is contracted out.  The trustee has an overall responsibility for the trust, pursuant to the terms of the trust indenture creating that trust.  The MBS trust has contracted with the servicer to actually perform the loan servicing in conformity to a servicing agreement.

A number of Wall Street concerns have vertically integrated into other aspects of the mortgage business, including origination and servicing.

The MBS purchasers are typically PASSIVE INVESTORS having NO actual day to day responsibilities for the management or servicing of the beneficial interests in mortgage debt that they own.

As you can see from numerous other posts, a number of mortgage servicers seem to be routinely involved in dishonest, unethical and illegal activity.  It would appear that some institutional trustees and Wall Street investment banking concerns may be at least complicit in such activities and are possibily actually involved in criminal conspiracies.

The MBS investors have NO interest in owning the houses at all.  Neither do the institutional trustees.  They tend to want to liquidate and be rid of it.  But there is an entire foreclosure industry of bottom feeders who are profitting in various ways as loans go into default and foreclosure.  ANd the interests of these bottom feeders are NOT always aligned with the investors to whom they owe a fiduciary duty.

One of the more fascinating things that hasn't yet really gotten into full swing is the passive mortgage investors SUING the Wall Street investment banking concerns and the foreclosure mills that created this toxic mess!

One other note is in order.  That is that INDIVIDUAL INCENTIVES may not always precisely align with institutional incentives.  That is if a manager working for a mortgage servicer has a cousin-in-law working for a foreclosure law firm or a real estate broker, there may be a hidden profit motive to precipitate default and foreclosure to line the cousin-in-law's packet.  Cousin-in-law is far more remote than the actual relationship is likely to be!  And where direct relationships are lacking other under teh table consideration may be at play, cash, in-kind and narcotic!  In short, there is a cesspool full of reasons that a loan might be pushed into foreclosure CONTRARY to the actual interests of the mortgage investor, which investor is RELYING UPON the representations and fidelity of the institutional servicer!

Hope that answers your question!
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srsd wrote:

Don`t believe everything you read.....think about this.....If you have had a mortgage for 5-10-15 years and paying interest the companies are making some money on the interest and other bogus charges.....now let`s say you are foreclosed on...the company takes the house and sales the house for any $ they want to sell it for...They have everything you have already paid plus what they sale the house for....how can they loose money??

So ultimately, it doesn't matter WHAT the value of the home is or sells for after repossession - all that matters is the money they've already taken, which is cash money in their bulging pockets.  Am I seeing this correctly then?

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~beenawhile


Actually, it does matter what the home sells for, after it has been repossessed or Foreclosed upon.

If they sell your home for a cool $10,000.- 75, 000.00 more; That is just another way for them  to make money and put it in their pockets.

And you DO need to pay attention to how much your Home sells for on the Real Estate Market.

I'm exactly where you are, scratching my head with the investor-bank-wall street sectors of this.

I think what some of us really need is an in depth drawing using different colors, and Outlined as steps.... 1.      2.....        3.....      and so forth.

Would anyone here like to make such a Drawing and post it for us?

Us Brain scratchers would appreciate it more than you would ever know!
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Ed Cage
William A. Roper ON: - - - - - - - - - - -
"April:
You ask an EXCELLENT question!  The SHORT ANSWER is that mortgage investors RARELY if ever want the house, NOR ar they generally INTERESTED in foreclosure.  There ARE exceptions as in mortgage investors who are BOTTOM FISHING, BUY delinquent or default mortgage loans at a DISCOUNT and then profitting by recovering the full face amount at foreclosure.

Traditionally, default and foreclosure was a NIGHTMARE for financial institutions.  And this was something to be avoided.

One of the consequences of the securitization of mortgages is the division of responsibilities and fractionalization of various interests.  The originator typically SELLS virtually ALL mortgage production to secondary mortgage market investors within sixty days of closing.  Very often originators sell the servicing rights to the mortgage, as well.  The originators therefore make their money on the original loan fees and markup received on teh mortgage production and servicing rights they sell.

ONLY under the circumstances that there was undetected FRAUD in the original mortgage application OR a default within the first six months will the originator find itself INVOLVED in the foreclosure, and this only through teh required REPURCHASE of the mortgage loan.

The loans are in turn sold or traded to FNMA and/or FHLMC or a private conduit.  Or larger mortgage concerns will aggregate the mortgages and securitize them themselves on Wall Street.  FNMA and FHLMC fund their purchases with the issuance of mortgage backed securities (MBS).

These various entitites make profits on mortgage sales and trading as well as guarntee fees.

The Wall Street investment banking concerns make investment banking fees, brokerage fees and commissions for structuring and selling the MBS deals.

By and large, the risk then is assigned to the PURCHASERS of various MBS issues.  And great creativity and ingenuity in crafting and engineering these securities makes it VERY DIFFICULT to the average person to follow and understand.  It is rather clear that some very senior Wall Street executives FAILED to fully UNDERSTAND and properly DISCLOSE the risks they retained in holding certain of these securities in portfolio!  And rating agencies seem to have gotten it WRONG, as well.   

In the end, it is the owners of the beneficial interests in the MBS issues that are truly at risk.  And Wall Street has laid off this toxic paper globally.  Some of it is probably sitting in YOUR state and municipalities retirement funds.  More is held by various foreign investors.

But the MBS trusts typically have NO EMPLOYEES.  EVERYTHING is contracted out.  The trustee has an overall responsibility for the trust, pursuant to the terms of the trust indenture creating that trust.  The MBS trust has contracted with the servicer to actually perform the loan servicing in conformity to a servicing agreement.

A number of Wall Street concerns have vertically integrated into other aspects of the mortgage business, including origination and servicing.

The MBS purchasers are typically PASSIVE INVESTORS having NO actual day to day responsibilities for the management or servicing of the beneficial interests in mortgage debt that they own.

As you can see from numerous other posts, a number of mortgage servicers seem to be routinely involved in dishonest, unethical and illegal activity.  It would appear that some institutional trustees and Wall Street investment banking concerns may be at least complicit in such activities and are possibily actually involved in criminal conspiracies.

The MBS investors have NO interest in owning the houses at all.  Neither do the institutional trustees.  They tend to want to liquidate and be rid of it.  But there is an entire foreclosure industry of bottom feeders who are profitting in various ways as loans go into default and foreclosure.  ANd the interests of these bottom feeders are NOT always aligned with the investors to whom they owe a fiduciary duty.

One of the more fascinating things that hasn't yet really gotten into full swing is the passive mortgage investors SUING the Wall Street investment banking concerns and the foreclosure mills that created this toxic mess!

One other note is in order.  That is that INDIVIDUAL INCENTIVES may not always precisely align with institutional incentives.  That is if a manager working for a mortgage servicer has a cousin-in-law working for a foreclosure law firm or a real estate broker, there may be a hidden profit motive to precipitate default and foreclosure to line the cousin-in-law's packet.  Cousin-in-law is far more remote than the actual relationship is likely to be!  And where direct relationships are lacking other under teh table consideration may be at play, cash, in-kind and narcotic!  In short, there is a cesspool full of reasons that a loan might be pushed into foreclosure CONTRARY to the actual interests of the mortgage investor, which investor is RELYING UPON the representations and fidelity of the institutional servicer!

Hope that answers your question!"
William A. Roper OFF  - - - - - - - - - - - - - - -

As usual another A+++ highly informative post Bill!
Ed Cage

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Joe B
BAW-

     I saw your post and have a question. You say you would like to see a step-by-step drawing to follow. As a group we may be able to put something together, but I want to ask you to clarify what exactly you are looking for.

     I suspect that with all the talent on the board, we may be able to put a pretty decent summary. If you want to kick-start us, please feel free!

JB
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~beenawhile

Joe B wrote:
BAW-

     If you want to kick-start us, please feel free!

JB
Oh gee, Joe.......... I have no idea how to do that.........~LOL!

I don't know where to start.
There was another thread last week, where there was a small pic, drawn up by someone who had written an article, it was posted on the board but I cannot remember what the Title  of the thread at the moment.

I remember you posted about it Joe, so I know that you saw it.

It is a small diagram showing the borrower, the bank, the investor, & so forth.

It would be much simplier for us to understand if such a diagram was drawn, numbering the steps, and like 1..... 2....... 3........ and explaing what each step is below, another thing that would be helpful is color coordinating each each step, like step #1. be drawn with a Green line, to the "Lenders" box,
like this for example:

Borrowers <--------STEP # 1----------------------> Lender

and below the diagram, (where you would explain what each step is about)         step #1....  be highlighted in Green.

then Step # 2  in pink.
example:

Lender <----------STEP #2-----------> To the next group Whoever that is.

and below the diagram, (where you would explain what each step is about)
Step #2 highlighted in Pink
 
 
Can't get rid of the colored background. Sorry!
Or you could draw this up in a different way if you think it would be better. I hope it wouldn't be too much trouble. We really could use this drawing though, since the one we saw last week was not A.) correct,     or B.) drawn to explain the entire process as much as it could be, or needs to BE explained.
 
Thank You, hope I helped you help us.~LOL
 
 
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~beenawhile
Okay so the green arrows didnt show up to well, maybe a diff. color.

and the diagram i'm talking about would be the
MONEY....................

Where alot of us are lost is in the "following of the money trail"
we get lost after the money comes from the lender, and is given to the borrower.

We need a money trail to show us how this works, all the way up to the top where the Wall- Street becomes involved, (if that's not where it stops) then we need the diagram to continue until it does.

That could be alot of work for one of you to do, but if it was done, it would be such a HUGE help, not only for me but for others also.

Thanks for any considerations, any of you might have.
and Thank you Joe!
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It seems like they would have to show where all the fees and charges are going. If someone would look into all of our files and where it shows the late fees and other bogus fees would have to be accounted for somewhere. Or maybe some of the upper management has some funds in his/her bank account that is questionable?

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~beenawhile
tired and tattered,

From my understanding, when the SERVICER causes your monthly payment to be late, and they then charge your account for a late fee, and you have to pay it....

That money goes directly to the SERVICER, they get to keep that money and it is not passed on to anyonelse.

The same for the Escrow, they charge your account, you pay it, and the SERVICER keeps the money, and does not pass it on to anyone else.

Same for B.P.O's
Same for Appraisals
Same for Misc, Fees
Same for Corporate Advance Fees,
and so forth.

The SERVICER gets to keep all the money that they collect from the borrower, that is NOT CONSIDERED A PART OF THEIR NORMAL MONTHLY "PRINCIPAL & INTEREST" payment.

Hope this helps some.


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Ms fraud is a smokescreen for a leveraged money scheme. There is no loss from foreclosures in the overall financial picture. In the first place before we even get into securitizations the whole monetary system is created from debt in the first place though the fiat fractional reserve system.

Lets say one of us wants to start a bank well most people would assume that we would need to have money to lend out and that we do this to collect interest.  Under a hard money currency system that would be true and was true  before there were nearly seven billion people on the planet earth the majority of which are artificially supported by a debt based exploitive oil fueled economy.

Bankers however were not content with lending money and waiting for years for it to come back so they created a fractional reserve system which allowed them to lend more money than what they had in the first place for example they could lend nominally ten dollars for each one dollar they had in deposit. How is that possible to lend more than you have, simple hope that no more than one in ten depositors asks for their money back at the same time. Now instead of collecting lets say 10% interest per year with a ten to one fractional reserve ratio and 10% interest the lender now effectively gets a 100% return rate, so they double the money each year nice trick huh?

Well that's not all this money is not even theirs it's supplied by the depositors and they  collect interest for brokering other peoples money.

Well the bankers got tired of these return rates and decided to cut the money that is mix junk metal with precious metal so for example they could make a dollar with 40 cents worth of silver and a penny or so in copper, zinc, tin or other base type metal.

The bankers got sick of that return rate and decided if no one cared about money that was half worthless and half valuable they would just plain try printing money on paper, making coins out of the base metal itself with no real value, and later just plain create a ledger at the bank and later yet just plain create it on a hard drive, this is called fiat money since the value is based on government decree. In other words the money is worth what we say it is and if you don't like that arrangement to bad. So a lender cannot loose money on a foreclosure no matter what they can only alter their debt ratio to the point where they are declared insolvent. It's not the same concept
as having a physical asset stolen or lost such as a car or home it's virtual money in the first place.

Looking for ways to get rich even faster for other peoples money Wall street creative banker types looked for ways to create greater leverage on top of the fractional reserve fiat money they already have. This system is often described as capitalistic greed gone psycho but it is actually a government  private  hybrid monopoly.  True capitalism  gives equal property rights to everyone but since we would be arrested for printing money,  lending out many times our assets  that blows the lid off theory we have capitalist economy.

And here is a simplified example of the complex money trail which explains that a $100,000 mortgage can be turned into million in securities and a $20-50,000 "loss"
at a sheriffs or judicial sale is not a loss but millions in potential profit, while providing the perfect smokescreen excuse for government bailouts and the public getting angry at the "irresponsible borrowers. Bear in mind that these foreclosures can take place after years of payments and the interest, equity, and increase in home value has to be taken into account. Bear in mind as well that foreclosure mills often transfer the foreclosed homes back to a trust partner, subsidiary,  or even after a  certain amount of time the  lender itself.

This is not a though explanation  or examination  of all the tricks  and schemes these fraudsters employ but a brief overview that shows a mortgage can be multiplied many many times it's original value and therefore foreclosures can be very desirable and profitable for many reasons from hiding fraud to injecting liquidity to multiple title claims, to artificial losses for tax reasons, and of course as a smokescreen to blame the borrower for bogus losses.


This is repost from the forum.

Panic on Wall Street

You've heard about the home-loan bust, but do you know your derivatives from your tranches? Read Salon's easy guide to understanding the current market freakout.

By Andrew Leonard



Aug. 17, 2007 | From New York to Hong Kong and everywhere in between, alarm bells are ringing. Central bankers are on 24/7 alert, ready to perform life support on catatonic markets. Stock traders are panicking -- the Dow's wild ride on Wednesday, down 350 points and then almost all the way back, is just the latest declaration of confusion and fear.

If you had been paying only casual attention to the financial markets as summer rolled along, you could be excused for glancing at the headlines and wondering, what the hell is going on? By many measures the global economy is growing faster than it has for decades. But in our globalized world, anxiety is everywhere. Soon after the markets close in New York, Asia's traders start running for cover. By the time they're exhausted, Europe is picking up the relay. And then back to the United States it comes.

People who devote their entire lives to studying the intricacies of high finance are confused right now. But the basic storyline isn't that complicated once you break it down into simple building blocks. And that's what Salon is going to do. Here are some simple questions and, we hope, some simple answers.

How did this happen? How did we get here? What does it all mean?

There is a standard explanation included as a paragraph in almost every story attempting to explain the current turmoil. It goes like this: Anxious to goose the U.S. economy out of its dot-com-bust doldrums, Alan Greenspan and the Federal Reserve Bank lowered interest rates to rock bottom in 2001. The resulting flood of cheap money encouraged an orgy of borrowing at every level of the U.S. and world economies. Whether you wanted to buy a house or a multibillion-dollar conglomerate, lenders were your best friends, falling over themselves to offer you whatever amount of capital you desired -- and charging low, low rates of interest. Cheap money led to a growing complacency about risk. If you ran into trouble, you could just refinance your house, or borrow a few billion more dollars today to pay off the billions you might owe tomorrow.

Greenspan's policies are being blamed for inciting the greatest housing bubble in U.S. history. The collapse of that bubble set off a wave of defaults by homeowners no longer able to make the payments on their mortgages. Mortgage lenders were the next link of the chain to break, followed by the investors who were trading in bonds and securities whose value was tied to these loans. Suddenly, risk was back!

So that's that? It's Greenspan's fault?

Partially, but interest rate tinkering is not the whole story. It may not even be the most important part of the story. There's another reason so many homeowners are in trouble and stock markets are imploding: Wall Street rigged the system so something like this was inevitable.

One could make a case that the biggest economic story of the last 10 years -- bigger than the dot-com or housing booms, bigger than their busts, perhaps even bigger than the extraordinary growth of the Chinese and Indian economies -- has been the astonishing growth of what is obscurely referred to as "structured finance," a crazy quilt of arcane derivatives and other "financial instruments" that have become the lifeblood of markets everywhere.

Whoa. Stop right there. What is a derivative?

Strictly speaking, a derivative is a financial doohickey whose value derives from some underlying asset. A mortgage loan is an asset. A pool of mortgage loans grouped together into a security that can be traded on markets is a derivative.

We often hear about the "real economy," that place where real people buy and sell real things, or go to work at real jobs where they make real stuff or deliver real services. Derivatives belong to what should be called -- but never is -- the unreal economy, a place where speculators make bets about what will happen in the real economy. Derivatives are vehicles for making such bets. If you think the borrowers whose loans are pooled together are going to make their payments, then buying a share in a group of such investments might be a good idea. That would be your bet.

A metaphor might be useful here. The real economy is like the Super Bowl. Real men on a real field push each other around and play with a real ball for a set period of time, and the team with the most points at the end wins. But while all this is going on, millions of outsiders who are not physically involved in the game bet on its outcome. Only they don't bet just on the outcome. They also bet on the spread -- how badly one team might beat the other. Or they can get more creative and bet on what the combined score of the teams might be, or which team's quarterback will be the first to be injured. There's absolutely no limit to the things that you can bet on, as long as you can find someone to take your bet.

The betting economy is the unreal economy. All those sports bets, no matter how kooky, are financial exercises whose value and meaning are derived from what happens on the field. Theoretically speaking, the betting economy exists in a separate dimension from the actual game, but we all know that's not true. There's so much money involved in gambling that the temptation to fix the results becomes irresistible. Players and referees, for instance, can be bribed.

We can call a bribed NBA official an example of "spillover" from the betting economy into the sports economy. The very same thing happens in the real and unreal economies. So much money is riding on all the derivative bets connected to the housing sector that Wall Street speculators essentially rigged the housing sector to make their bets pay off.

To understand exactly what happened, we must take a closer look at a particular kind of derivative: the infamous "collateralized debt obligation," or CDO.

Say what? Collateralized who which how?

Don't worry about the name. Call it an extra-special funky doohickey if you like. It's not important. What is important is its function, which is to make things that should be considered risky take on the appearance of less riskiness.

After a mortgage lender makes a loan to a homebuyer, that loan is packaged up with a bunch of other loans into a security -- a financial instrument that can be traded. Securities are rated by rating agencies according to the chances that the underlying assets will be defaulted upon. U.S. Treasury bonds, for example, get stellar AAA+ ratings because the U.S. government is considered likely to meet its obligations.

A security based on a pool of subprime mortgage loans would normally not deserve an AAA+ rating. Subprime, by definition, means "not so good." Subprime loans are made to people who can't put together a down payment or have bad credit, or can't prove they have a job. Subprime loans are risky!

Many investors -- particularly in pension funds and municipalities -- are prohibited from investing in securities that are not high-rated. Let the hedge funds and the investment banks play around with the risky BBB stuff, the "junk." The rest of us should be more prudent.

But investment bankers are clever fellows. In cahoots with the ratings agencies, they came up with a way to magically transform a low-rated security to a high-rated security. (The culpability of the ratings agencies -- Fitch, Standard & Poor's, Moody's -- should be not underestimated. It might be helpful to think of them as the bribed referees in this game.)

Enter the collateralized debt obligation. The CDO takes a pool of risky mortgage loans and divides it into slices. (Wall Street calls these slices "tranches," but that seems to be a word that makes the brains of normal people freeze up, so we'll ignore it.) For simplicity's sake, let's say that a mortgage-backed security gets divided into two slices when it is transformed into a CDO -- a senior slice and a junior slice. Let's say that the senior slice gets rated AAA+ and the junior slice gets rated BBB-. But if anything goes wrong -- if the homeowners whose loans are part of this security start missing their payments -- the investors in the junior slice have to lose all of their money before the investors in the senior slice start feeling any pain. That's the beauty of the scheme. You take a bunch of bad loans and turn some of them into high-rated gold and some into lower-rated bronze. You sell the gold to the cautious and the bronze to the bold. If a few loans go kaput, the bronze investors suffer. If all the loans go kaput, everybody gets hurt. Unless there's a total financial meltdown, everyone is happily making money.

We keep hearing in the financial news about risk being "sliced and diced." Is that what you're talking about?

Yes. After the transformation, we now have an instrument that satisfies the desires of both conservative investors, who can just buy the AAA+ rated slice, and investors who have a taste for risk, who can buy the BBB- slice. It's a brilliant work of alchemy.

And very popular. CDOs tied to subprime mortgages became hot commodities, snapped up with gusto by traders all over the world -- even the riskiest, most likely to self-immolate, lowest-rated slices of those CDOs. Especially those slices.

Why? Why was there such an appetite for risk?

No risk, no reward. In the securities world, financial vehicles whose underlying assets are risky yield higher rates of return. Subprime loans ultimately charge higher rates of interest than prime loans. That means that as long as homeowners don't take advantage of introductory low rates and pay off their loans early, pools of such loans will throw off a higher stream of income than pools of less risky loans. Traders who want to get a piece of that higher stream of income will take the chance of default.

This is where we approach the crucial turning point. Many different parties have been blamed for the housing mess. Homeowners are told that they should have read the fine print on their loans and should have avoided taking on financial obligations that they couldn't meet. Mortgage lenders are blamed for pushing the risky loans in the first place. And of course, there's the maestro, Alan Greenspan. But these attributions of guilt all miss the mark. The incentive for everyone to behave this way came from Wall Street, where the demand for subprime CDOs simply couldn't be satisfied. Wall Street was begging the mortgage industry to reach out to the riskiest borrowers it could find, because it thought it had figured out a way to make any level of risk palatable.

So Wall Street wanted mortgage lenders to make bad loans?

Let's return to our Super Bowl metaphor. The gamblers aren't satisfied with their odds of winning, so they bribe a player to fumble at the one-yard line and alter their bets accordingly. Wall Street traders, hungry for more risk, fixed the real economy to deliver more risk, by essentially bribing the mortgage originators and ratings agencies to fumble the ball or make bad loans on purpose. That supplied CDO speculators the raw material they needed for their bets, but as a consequence threw the integrity of the whole housing sector into question.

But hang on. Isn't the total amount of subprime loans outstanding just a fraction of the overall home-lending market? And isn't the U.S. economy still growing? Why has just one small sector of one country's economy caused so much trouble?

Two main reasons: a lack of transparency and an overabundance of leverage.

What's been described here so far is just the simplest possible model of how things work. The truth of what is really going is far more complex. So complex that no one has a good handle on exactly what will happen if things go awry. Not regulators, not traders, not even pessimistic journalists. Try reading an SEC filing from a New York investment bank -- it is one of the most difficult-to-comprehend documents ever created by the human mind.

It is not, in a word, transparent. It serves the opposite purpose: It is an instrument of obfuscation. Because of failures of regulatory oversight, we have very little idea who owns what, or what risks hedge funds and pension funds and municipalities and mutual funds are really exposed to. This is all fine and dandy if your goal is to prevent your competitors from understanding what kinds of bets you are making. But it becomes a much more severe problem when you're trying to figure what is going wrong when the trains start derailing.

(By the way, if you're looking for something that government could do that might address this problem, calling for greater transparency carries the double whammy of being both the right thing to do, and rhetorically speaking, something that free markets are supposed to depend on for their proper functioning.)

Next up: leverage. Archimedes told us that if he had a lever long enough and a place to put it, he could move the world. Speculators in the world's financial markets also like leverage; but they don't use crowbars to move objects -- they use borrowed money to make bigger bets. This is fine as long as your bets pay off. But when your bets go bad, the people whose money you borrowed want it back.

Right now, a great many people want their money back.

The people who say that subprime is just a small part of the economy are correct. What they fail to note, however, is that the same games that Wall Street played with subprime are likely being played in every sector of the economy. It's not just a Super Bowl whose results can be fixed. The NBA, and Major League Baseball, and the Tour de France and the Olympics are all under the same pressures.

Subprime ripped a window open into the way business as usual is being conducted.

Now everyone wonders, what's next?




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Moose

April wrote:
Here's the part I don't get, and please help me understand this, because I can follow the logic in this scam only till it hits Wall Street...I understand how the loans get pooled and investors get involved.  What I don't understand is do the "banks" or servicers actually want the houses back, especially with housing prices in a slump, or what?  Wouldn't it be a potential loss to take the homes back?  This is so complicated and I am trying to follow the chain of how and why this is happening, I understand the bottom line is probably the most important thing to these people, so if foreclosing is a costly prospect for banks, why are they so intent on doing it?  My husband and I have been scratching our heads on this one.

Insight anyone?

April, investors want the cash flows from the loans. They get their check from the trustee. They are passive investors. They don't want and in fact, can't handle homes.

Lenders ("Banks") aren't involved any more. Once the loan is securitized they are out of the picture unless they are forced to buy the loan back for some violation of the terms of the offering.

Thus, the servicer is at the center of the storm. Under the terms of their Pooling and Servicing Agreement with the trustee (their customer), they are the ones who pull the trigger on a foreclosure and are required to manage the disposition of the assets to minimize the loss to the trust. Along the way of minimizing the loss to the trust, they get to charge for things they do.

So the question of whether or not they want the house is more correctly asked this way:  "Will the foreclosure and sale of the property be a net gain or a net loss to the servicer over time?"

You can't know the answer to that based on information you have readily at hand.  If you have significant equity in the property and it can be sold quickly, they will fast track the foreclosure, especially if they don't think you'll be able to pay.

If they discover you can pay (especially more than your normal payments), they will grind you through the forbearance process to maximize their revenue.

If they do obtain the property in foreclosure, managing REO (Real Estate Owned) is another seedy side of the business involving relationships with agents and brokers who sometimes have to kickback part of their sale commission to keep the flow of listings. Depending on market factors (time on market, for example) and the network of agents they have it may not make sense to foreclose even if there is equity to capture. 

Some figures they keep in mind include taxes, insurance, maintenance, etc., which is one of the reasons they sometimes don't change the name on the county property records - that way the city or county can't serve them with code violations on an abandoned, deteriorating property.

The lending industry wants to keep everyone singing out of the same book that foreclosing is a costly process that they don't want to have to resort to.  It's mostly smoke and mirrors accounting babble.  Enough of them are profitable to more than make up for the ones that aren't, and if you consider that most of the fees tacked on are utterly bogus, those alleged losses are even more dubious.

So don't try to calculate their rationale for a foreclosure. The servicer knows and is not going to reveal anything that might arm you with a justification for litigation.

Moose






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