I'm a bit surprised that nobody else started a thread about this news story:

http://afp.google.com/article/ALeqM5gRun6CfwttVE1MD6bU2Zmb6HrK0g

The FBI states that it is investigating 21 banks for "accounting fraud, the documentation of mortgage-backed securities, and insider trading."

I like how some are blaming US Senator Charles Schumer of New York for going public about his concerns with IndyMac. Blame the messenger.

Thank God for President Franklin D. Roosevelt and the FDIC.

Me too. It's been online and on some talk programs for a while now.

IMHO, very ugly stuff.

One thing that's beginning to come out is this structure where a loan is done, and the lender does not keep the loan, but instead bundles it together with other similar loans.

This forms a loan class, where buyers for the loans can choose what they want to buy, then they call these 'assets'!

WTF?!?

To me, that's really backward. Having an asset means holding title to something that has intrinsic value. Buildings, cars, materials, maybe even things like processes. (that's debatable, but hey, I'm open)

One can point to the asset and say, "there it is and it's worth X right now." Then the usual stuff follows, things wear, become less relevant, scarce, and depreciate, or appreciate, depending on the kind of asset it is.

So, how the hell is a loan an asset?

The loan itself has no value. That's just paper. It's an arrangement, secured by some asset of course --or maybe not. Maybe it's just a simple loan.

Anyway, the asset in the case of these mortgages is the house, but the house is not getting bought and sold, only the agreement as to payments concerning the house are.

This, to me, then is a simple liability. The lender has a percentage of their working capital dollars, tied up in the borrowers asset. So those dollars are not liquid, and the return on them is subject to significant risk.

The interesting thing to me is this selling of loans then.

If the loans were not sold, the lender would have a significant interest in qualifying that loan, because they would not have the use of their capital during that time, meaning the returns are directly tied to how much risk is in the loan, and the terms, etc...

Make too many bad loans, and the returns are not enough to keep the operation solvent, and it all goes downhill from there.

Now, if you have another company rapidly churning it's capital, they don't have as much as an incentive to do this. They only tie up their dollars for a short time, say 6 months. After that, those dollars are available to use again and again to get returns on short term investments; namely, loans that they will sell.

In this case, they actually have a significant incentive to downplay the risks in their loans, so that they are more attractive to those looking to invest for the longer haul.

Brings new meaning to the term, "mortgage backed security" doesn't it?

The way things have been going, it's not all that secure, particularly with the overvaluation of the houses that's been going on.

How many of those loans are backed by a home that's worth perhaps half the principle amount of credit tied up in it?

Lots.

Given the houses are valued very, very high, or were I should say, what's the incentive for people to stick around and get their return in terms of home ownership?

Dropping rapidly as buying power per hour worked does, I would imagine.

The republican's "hands off business" kind of government. Gotta love it.

I think that the mentality amongst these mortgage lenders is that a loan is an asset because it gives them the right to collect interest on the money owed.

I was thrown for a bit of a loop when I bought my house. The mortgage officers with whom I did business worked for a company called "Pacific Republic Mortgage." At the end of the process, I was informed that Pacific Republic does not service mortgage loans and that my loan would thus be sold to a third party, Countrywide Home Loans. This left me wondering what value all of these mortgage brokers bring to the table, as many of them are bound to sell off their loans to a much smaller pool of lenders.

I know this sounds a bit nanny state like, but maybe people who buy real estate should be required to take a class on purchasing a home. For most people, buying a home is their biggest investment ever. For years, I listened to financial expert Bruce Williams on the radio and he recommended including an attorney in the process. If you’re going to spent $300,000 for a home, it might make sense to have an attorney go over the documents related to the purchase. Given all the various types of loan packages one can be drawn into, it might make sense to meet with a party who has your best interest at heart. I've been aquatinted with a couple people in the mortgage business over the years and their conduct wasn't stellar. And clearly, as we’ve seen recently, many banks with seemingly good reputations have engaged in conduct that wasn’t stellar either.

Bruce Williams was just great. Got me into talk radio, while driving a pizza car back then.

His attorney advice served me very well when buying my first home. We did a for sale by owner deal, each went to our attorneys, who sorted out all the details and we closed for $300, owner carry contract, deed in trust kind of thing.

Eazy cheezy.

On the second one, there was an easement issue. Bruce helped with that as well.

With all I've learned about money, banking and such, I'm rapidly becoming a nanny stater on these things. The incentive to profit from corruption, or through hiding / transferring risk is just way too great.

Besides, there are a lot of middle institutions that don't add a lot of value. With electronic funds these days, I have to wonder why we have so many of them.

The cost of value transfer has been rising rapidly. All this really does is put a drain on commerce, IMHO.



Agreed on the classes. Might be something for the local community college to do, maybe on grants or something.

Should you have to take a class to buy a car? A boat? Start a business?

C'mon guys, gimme a break.

If you can't handle looking out for you own best interests when investing your money or borrowing money, then you deserve to lose. The decision to buy a house shouldn't land on the backs of the banks, the buyer should know what they can and can't afford.

Just because you go to an all you can eat buffet does not mean you should eat until you throw up.

And remember this: Lenders wouldn't have made the loans if the DEMAND was not there from the buyers. Blame the investors providing the cash and missing big on measuring the associated risk, not the stupid greedy borrowers who marched on to their own slaughter less than 5 years after a boom and bust cycle in the stock market. Real estate is a cyclical business. This is isn't "Deal or No Deal". You're not playing with house money!

I think they should be offered at least.

Maybe classes should be required for borderline cases -- people that barely qualify.

Until relatively recently ( a few years ), classes were required for FHA homebuyers. Then they became offered as an incentive for a slightly lower rate. ( Usually an 1/8th to 1/4 less ).

Then they went away altogether.

So noting some value for homebuyers and lenders, in having an educated public, is valid. So valid, in fact, that they did it for a while. It served many purposes. But in the end, the education didn't offset the foreclosure rate enough to offer the lower rate. Which was just one of the reasons they were even offered to begin with.

We, as mortgage brokers, do provide a value in being able to find a wholesale lending rate that you, as a homebuyer, would be unable to take advantage of if you just went into a bank and got their " retail " rate. To say nothing of the limited loan programs that bank branches have to offer.

However, you can find excellent programs within your bank if you have a good relationship with them. So banks have value as well.

But your points are not lost on me. I guess you just have to do as much of your homework as you can until you feel comfortable with whomever you are using to help you buy a home. Do you trust them? Do they offer you options? Do they educate you about the process AND the result? If you get 3 " Yes "s - then you are probably going to be OK.

It's a big deal to take out a home loan. The system is designed to set you up for success. But, as with anything, the system can get corrupted at just about any step.

It doesn't have to be that way. But, yes, it often is.

If the US banking industry needs HUGE infusions of cash from the Federal Reserve and international banks because they've lent so much money in bad mortgage loans that will cripple the economy for years -- then something’s got to give. And the banking industry sure as hell doesn't care one whit about whether person understands the nuances of financing a home. Only now with their financial positions in the crapper do we see them tightening credit. They send credit card applications to every Tom, Dick and Harry with a pulse. Their record relative to mortgage lending is no better. Putting people into homes they knew they could not afford could have easily been avoided. What’s especially shitty is that many of the people who took out these loans were people who had never owned a home. They trusted these banks and mortgage lenders to work honestly with them. Instead, they were set up to fail.

As for lenders making these loans; the lenders have a fiduciary responsibility to loan money to people who can afford to pay them off. So to blame the borrower for the banks mismanagement is truly misplaced. And just because there is a demand for these loans doesn’t mean you lend them the money. Banks lend money to people and institutions who can pay them back. It a very sound principle of economics.

As for borrowing money for a business? I think that should be required to learn about the lending process. Maybe we’d have fewer start-up’s fail. The failure rate among new businesses is pretty high. I’m sure if a person had a better understanding of how the financial side of a business operated, they’d be much more prudent in how they operated their business.

You'd think we would have learned with the savings and loan crisis 20 years ago? Remember the Resolution Trust Corporation? How many hundreds of billions of dollars did that cost? Every couple of decades we seem to find ourselves in one of these messes because the financial serves industry gets royally greedy -- and the taxpayers get stuck holding the bag.

There is a reason why there is government oversight of the financial services sector -- because they can't be trusted. You think the chairman of WaMu is worried about his mortgage getting paid? Probably not, but ask the thousands of borrows who contributed to WaMu's $3.3 billion dollar quarterly loss how they're holding up.

hmm . . . WaMu lend us the construction loan on my house some time ago and were pretty . . . ahem, asstight, on just about everything. I'm surprised that they let things slide on the mortgage side.

If a homebuyers' class had been offered in 2001, I would have attended it voluntarily. It would have helped a great deal if I had had a neutral party explain the home buying and financing process, as well as the associated jargon and legalese.

Homebuyer's classes have always been offered. However, because they typically cost money and take time out of a weekend, most people wouldn't bother.

The most important thing when buying a home is to team up with a trusted realtor and a trusted loan officer/broker, and ask LOTS of questions. People that tend to shop rates, fall for TV, radio, internet, or newspaper advertisements end up working with the losers of the industry. Any realtor or loan officer that does a good job for their clients doesn't need to advertise, their previous clients do it for them.

Now, when it comes to the folks that took the "too good to be true" deals, let them foreclose. They didn't put any money into the home anyway, because most likely, they did 100% financing. People act like banks went out and convinced these buyers to take these loans and buy homes they couldn't afford. The truth is, the buyers CAME to the lenders SEEKING these loans so they could keep up with the Jones's. Typical American greed and ignorance.

Banks made it too people easy for people to borrow money -- people that should have never been approved for certain home mortgage loans. It's the banking industries greed that put us in this mess -- and it's not the first time. Had they held to prudent lending practices, we wouldn't be in this mess. But this shouldn't come as any surprise, given the laissez faire attitude government regulators took with the banking industry and their home mortgage businesses. Nothing seemed to risky to the banking industry. We'll lend to anyone the law allows -- regardless of their financial standing. I don’t think homeowners should be held completely blameless, but the banks most certainly did not behave responsibly. And again, because of their dereliction of duty, we’re stuck pumping money into the banking system to cover these costly but very avoidable mistakes. Banks in this instance behaved like drug dealers, they were facilitating very bad habits.

Drug dealers only deal drugs if there are willing buyers.

Not to say the banks don't share some of the blame, but the fact remains no bank has ever held a gun to someone's head to sign their loan papers. Obtaining a home loan is strictly optional, and there are tons of choices and banks to work with. The buck stops with the buyer, and they should have known they couldn't afford the payment themselves.

Banks lied to their clients by selling them more than they could afford – and they knew it. It’s an act of criminality. It's fraud. Banks know full well what a person can afford -- and to lend someone more than they can afford is preposterous. It's more than preposterous, it's insidious – and its shear greed. If I can only afford a $250,000 loan, then why the hell loan me $400,000? And to use the excuse that these was pressure to make these loans defies common sense. You would expect a banking institution of holding the line and lending what a client can appropriately afford, not what they want if it exceeds a rational lending formula.

The liberal view is that it's always someone else's fault. What ever happened to personal management and personal responsibility.

I see both sides of this. I've been on the shitty end of the stick on here, and to be honest I only blame my ex and I. (Well her more, she's the one who HAD to have the damn house!) It was much more house than we qualified for conventionally, and our mortgage shark promised us that we could finance in six months, he would waive the prepayment penalty, and all would be well.

Well, within that six months, the subprime market collapsed, and we were stuck with this giant house and the giant payments. We were able to get out from under it, but we did lose our asses. Needless to say, getting refinanced was not an option.

Did we have a snake for a mortgage guy? Absolutely. He ended up being investigated by the feds and getting into a lot of hot water for doing this to a lot of people. That said, WE still signed on the dotted line.

CJ and I honestly think the vast majority of the mortgage guys are honest, scrupulous, and looking out for the best interests of their clients. That said, it is the job of us clients to make sure to look over EVERYTHING and question ANYTHING that looks shady.

The liberal point of view -- hundreds of billions of dollars in losses by US banking institutions and you blame liberals. That doesn’t pass the laugh test. I'd love to know how much money was funneled to GOP coffers by financial institution types to turn a blind eye to bad business judgment by US financial institutions. And what about the Bankruptcy Bill signed by George W. Bush? The financial services sector dumped millions into getting their way on the legislation. Last time I checked, Wall Street was a bastion of conservatism. Ever your president George W. Bush is quoted as calling Wall Street "drunk". You blame the liberals for the collapse of the savings and loan industry too?

Talpdx, with all due respect, I think you are simply misinformed on what has occurred in the housing and mortgage market. If a loan program exists, funded by Wall St investors, says that if you have a 700 credit score and 5% down, you don't have to document your income, then how is the bank lying to the client? It's the other way around. The buyer knows these programs existed and used them to GET WHAT THEY WANTED. Besides, if a home buyer meets the guidelines as set by the investors, the lender's obligation is to make sure they meet the guidelines set. Denying people loans they qualify for is discrimination.

Blame the investors for ponying up the capital and abandoning traditional underwriting standards. Blame the buyer for not doing their homework and relying on an endless supply of cheap money to take care of you in the future, and for assuming they would always qualify for something in the future (which is an unknown). Sure, there are snakes out there, but the vast majority of folks that find themselves in trouble today have no one to blame but themselves. If Bank A wouldn't give them a loan, then they would go to Bank B and Bank C until they got to Bank H to get what they wanted.

Do you read the Wall Street Journal, New York Times or watch CNBC? How much money has the Federal Reserve and international banks loaned these Wall Street firms to shore up the financial services industry stupidity in the home mortgage business? These irresponsibly manipulative loan packages were the creation of the financial services industry, not the borrowers. They were designed to maximize short term profit without regard for their long term legitimacy. Banks cared about one thing, and that was making obscene profits. But what do we have now, LOSSES after LOSSES. Yesterday – almost $20 billion in quarterly losses reported yesterday in the banking sector. Why, bad mortgage sector loans. Again, floating these Mickey Mouse mortgages were the ideas of the banks, not consumers. And to try to frame it as the banks being taken advantage of by consumers is about as absurd as calling George W. Bush a great president. Consumers bought into them at the behest of their trusted banking institutions. And too, if these banking executives were the victims, why have so many of them been shown the door lately? Good management practices in a sea of dastardly greedy consumers?

I'd like to meet the crafty lawyers and CPA's who created these new loan schemes -- and ask if their intention was to help the banks make quick cash or help the consumer purchase a home with the knowledge they'd made a safe investment with a quality lending institution. I'm sure it was the former and not the later. Because if it were the later, we wouldn’t be watching the banking sector bleeding red.

If I were to follow your logic, then it was a vast conspiracy on the part of borrows to rip of banks. Why then doesn’t the financial services sector seek to have criminal charges brought against these borrowers for conspiracy to commit fraud against the financial services sector? I’d love to see the financial services sector convince a DA to take such an accusation to a grand jury.

One other item -- there are federal regulatory lending standards banks must meet when loaning money. It's not up to financial services speculators to set those standards – it’s the government’s responsibility to set those standards. That’s why so many banks are under investigation for violating the law.

These loan packages weren't created yesterday, they've been around for decades. Only recently with historically low interest rates and rapidly appreciating real estate did they become more popular among consumers because both the investors AND consumers felt they could take the risk in order to profit. And every person that filled out a loan application with an income figure that was not true DID commit loan fraud, which is a felony. There's a reason they call a stated income or no doc loan a LIAR LOAN.

Like I said, just because you go to a buffet doesn't mean you eat until you throw up. If you do, you're bad, you should know better.

A trillion dollars in loan fraud? The consumer class banded together to screw the banks to the tune of a trillion dollars? These smart men and women who run America’s banks were bamboozled by average American banking consumers seeking to take out a simple home mortgage to the tune of a trillion dollars? I guess this whole mess boils down to forged loan documents. That clears it up. Don't blame the banking industry. They did nothing wrong. Their culpability in this matter is zero. It was all a matter of irrational exuberance on the part of consumers. The banking executives were not telling their employees to ignore old lending practices and open up the process to people with questionable income and liquidity. Speculators would never do anything that dastardly. Consumers got caught up in cheap money and figured they’d screw the banks in the process. They were all busy doctoring W-2’s and forging their 401K’s. We can blame this whole mess on Joe and Jane Sixpack for providing false documentation to the naive loan officer of SO and SO National Bank. That seems like an awfully convenient excuse for the banking industry – which every couple of decades finds itself in a f*cking mess because of blatant greed and sheer stupidity.

As for the buffet analogy, that sounds like something you'd tell someone before borrowing money from a loan shark.

Talpdx, your posts are absolute classics on "I'm not responsible for my own actions".

It really doesn't make any difference how loose the banks were, they are the ones who have to live with the consequences of that.

The buffet analogy is right on. You eat too much, you get fat, it's the buffet provider that's at fault. I have to wonder what your background is that you have become so blatant a "it's the other guys fault" person.

I think the buffet analogy is right on as well. It's not the restaurants fault if you eat to much at an all you can eat buffet. Same goes for mortgages, credit cards, car payments, etc.

Talpdx, clearly you don't really know the ins and outs of the banking/mortgage industry. Consumers were not doctoring W2's or 401K statements, they were not providing them because the loan requirements didn't ask for them! These loans have always been around, mostly for the self employed. But rather than use personal responsibility and borrow only what YOU KNOW you can pay back, the consumers took chances they couldn't afford to take. Like I said, the investors who provided the capital in the market bear some of the blame as well, but no one forced anyone to take out risky loans or buy homes they clearly couldn't afford, the consumers made that decision all on their own.

Example: Joe Sixpack goes to the bank to apply for a loan and has some choices:

FHA 30 yr fixed at 6.5% with 3% down. Because you have to document your income, you only qualify for a $200K house and it gives you a payment $1500/mo.

3 year stated income ARM at 5.0% with 0 down and interest only. You qualify for a $275K home and it gives you the same payment of $1500/mo.

Now how many consumers do you think decided to take the FHA loan? Not many. And it's not the banks who forced the consumer to take the riskier loan, the consumer made that decision on their own because they wanted the more expensive house with the same payment!

Vitalogy, it doesn't take an MBA to understand that the banking industry f*cked up – which is not unusual given their history. Whether I understand the nuances of the mortgage business is irrelevant, but I appreciate the tutorial. Look at any bank stocks lately? You’re trying to tell me that their predicament is because these loans that were floated to consumers were healthy and sound financial instruments? My goodness, you even refer to these loans as risky. Once again, a trillion dollars in bad loans by the banking industry and it's all because consumers were providing banks with false information to banks. That's classic. I thought the goal of industry was sell products and make a profit? Where does it say that MASSIVE LOSSES as a result of selling a defective product makes for a good business model? If a small business were to engage in such conduct, you’d probably support their closure. But if it’s a financial services firm with a Wall Street pedigree, it’s ok – just because it’s Wall Street. No matter the negative impact to the overall health of the economy, that’s not relevant. If you sell a loan product to a customer (any loan product for that matter), isn’t the goal that the consumer continue paying on it for the duration of the loan, successfully? How does it benefit anyone to create loan schemes that are doomed to failure – to the tune of a trillion dollars? And isn’t it a coincidence that all these foreclosure’s occurred simultaneously? How do explain that? The banking sector would never engage in any sort of unscrupulous lending practices, oh no. It’s all the big bad consumers fault.

As for the brain trust Deane's remarks, it's the banks who eat the loss? Once again, you delight us all in proving your ignorance on yet another matter of import. No Deane, it's the consumer and taxpayer that pick up the tab. But again, given your unqualified support of George W. Bush and his drunken sailor approach to matters of fiscal policy, your remarks should come as no surprise. The fact is Deane, I take responsibility. In this case, the conservative financial services industry – darlings of the GOP did not. And that's why in part our economy is in the toilet. So to blame it on liberals is just another example of your general ignorance of matters discussed on this board. And I bet Deane you blamed the Savings and Loan crisis on liberals too? Remember Neil Bush and Silverado Savings and Loan? He a flaming liberal?

Great thread!

How about this.

If somebody offers up a buffet, it's not their fault people consume too much and get sick, right?

I think we agree on that.

So, let's say the people have been starved. Now somebody opens up an inexpensive buffet, the people get stuffed and get sick.

Is that the same thing?

Will there be Eggs Benedict?

Absolutely!

Seriously, I see this issue being somewhat more complex than just people taking too much risk. IMHO, there is a lot of risk being pushed onto people right now. Seems to me that's part of the equation.

I'm all for personal responsibility. In fact, I'm living that right now, downscaling and such to make it all work without carrying debt. Almost done too.

There will be NO credit when I'm done. No debt either. Then I build from there.

Having gone through this exercise, I'm now very aware of how credit of all kinds is pushed on us and pushed hard. Lots of things require credit, or at the least are difficult without it. The expectation that credit solves a lot of problems is set way too often.

For the last X years, to combat diminished buying power and essentially flat wages, people used homes as ATM's. Ok, so this was bad and irresponsible. I get that and agree with the consequences of it.

However, many of those people are hard working people, trying to maintain their standard of living. Is it all their fault that things are being devalued beneath them? (and they are through our currency, and with increased risk they must carry these days)

That's not the whole story, but maybe enough to clarify where I was going with the buffet analogy.

So, all that pressure coupled with very easy to obtain credit, and lots of messaging framed around "get what you deserve", and it's seductive, right?

That's the staving people / cheap buffet bit I was trying to get at.

Feels a lot like, either sell your future, or live a whole lot less now. On one hand, living smaller or within one's means is the right thing to do.

On the other, let's say people have done that. With their buying power diminished and their workload and risk increasing, isn't that just a bit unbalanced?

Say credit was very, very difficult to obtain. That would force a lot of people to scale down, or go hungry right? In that scenario, would all that risk transfer and devaluation be seen as acceptable then?

I seriously doubt it would have. People would be in the streets.

Instead, they were presented with "solutions", some good, some bad. Most of those solutions involved selling the future to pay for the now.

In my personal life, I managed to avoid most of those. Wasn't easy. Not complaining either. However, almost NOBODY I know did the same, and now they are in real trouble.

Are that many of us that stupid, or is the combination of things together difficult enough to cause trouble?

If the latter is true, then some regulation is warranted to make sure it just isn't. Also, some regulation is warranted just for the common good. Everybody loses when we see problems like this. Mitigating them makes sense.

We don't allow people to practice medicine without regulation and education and certification. We don't do this because malpractice impacts lives.

We don't allow people to practice law for similar reasons.

Sure, there are loopholes where people can do their own thing, but they take their own risks too. Not really talking about that.

So, financials are things that can really impact lives right? That impact is greater now with bankruptcy law changes as well.

Seems to me that just placing the burden to be aware and knowledgeable on people isn't an equitable proposition, given the risks involved.

OF COURSE there's plenty of blame to go around... the banks should have known better, the buyers should have known better, the government regulators should have known better, but the ones who REALLY should have known better are the brokers.

I think where Tal goes wrong is in assuming that it was real bank loan officers making these BS loans. I may be wrong but I believe the vast majority of the flaky loans were made just like my mortgage was - by some 6-months-in-the-business broker working for some fly-by-nite organization who had no interest in the long-term viability of the loan. They just wanted to pocket their fees and turn around and sell to Countrywide - which is exactly what they did!

EVERYBODY was trying to get rich off the real estate boom... lots of inexperienced people were becoming brokers, lots of first-time-buyers were buying, and financial institutions were getting in hip-deep with complicated new instruments which they had no experience with and were so many steps removed from the actual loan that they had poor visibility into exactly what a house of cards they really were.

And guess who's under investigation? Everyone's favorite, Hayes Barnard's Paramount Equity Mortage!