"The Real Story is Fraud"

Angry Bear's rdan points to this commentary on the motivation for the Paulson subprime mortgage plan. I don't know if there's anything to these accusations or not, but if they're correct, there are reasons for concern:

Interest rate 'freeze' - the real story is fraud, by Sean Olender, Commentary, SFGate: New proposals to ease our great mortgage meltdown keep rolling in. ... Now, just unveiled Thursday, comes the "freeze"... But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it. I can hear the hum of shredders working overtime...

Despite Thursday's ballyhooed new deal with mortgage lenders, does anyone really think that it can ultimately stop fraud lawsuits by mortgage bond investors, many of them spread out across the globe?

The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC. ...

As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.

Perhaps some U.S. government department can make veiled threats to foreign countries to suggest they will suffer unpleasant consequences if their largest holders (central banks and investment funds) don't go along with the plan, but how could it be possible to strong-arm everyone?

What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back. The time to look into this is before the shredders have worked their magic - not five years from now. ...

The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications ..., mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, "Fraud? What fraud?! You knew the borrower's real income and asset information later when he refinanced!"

The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans didn't involve fraud.

The government is trying to accomplish wide-scale refinancing by tricking bond investors, or by tricking U.S. taxpayers. Guess who will foot the bill now that the FHA is entering the fray?

Ultimately, the people in these secret Paulson meetings were probably less worried about saving the mortgage market than with saving themselves. Some might be looking at prison time. ...

It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.

I suspect that such a group first sat down and tried to figure out how to protect their financial interests and avoid criminal liability. And then when they agreed on the plan, they decided to sell it as "helping working families stay in their homes." That's why these meetings were secret, and reporters and the public weren't invited. ...

We are on the cusp of a mammoth financial crisis, and the Federal Reserve and the U.S. Treasury are trying to limit the liability of their banking friends under the guise of trying to help borrowers. At stake is nothing short of the continued existence of the U.S. banking system.

Update: Felix Salmon reacts strongly - and negatively - to the editorial.

Comments

[Lafayette]

Article: The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

A perfect storm in the making

Good point, but exaggerated journalistic license nonetheless. (AKA, "not quite the complete story".)

There has been NOT ONE MENTION in the European press of any bank (or SIV buyer) intending to do the above. OK, so maybe they (and their American counterparts) are keeping it a BIG secret ...

Furthermore, it is entirely unsure that such a suit would (1) be accepted and, if so, then (2) would be successful at recuperating total cost. Let's look at the consequences of just such a suit.

The real culprit, the debt resellers will argue, is the rating agencies whose estimations falsely implied little or no-risk in the repackaged debt. These agencies too believed (the conventional wisdom) that realty-backed debt was not risky because defaulted homes could be recovered/resold.

A bit more thinking would have described that, though such is true, recuperation on default is not only costly but does not necessarily recapture the total net worth value in a market with falling realty prices -- not nearly enough of it.

They did not see, in their blindness, "a perfect storm in the making". So, yes, this is culpability that could win over a jury. (Unless the defense argues, "Well, the rating agencies did not know that the boom would become a bust. If the bust had not happened, defaulted debt would have been recovered at near cost". True enough ... BIG little "if".)

Was there connivance between the rating agencies and the bond sellers? Difficult to tell and even more difficult to prove concretely before a jury.

Also, consider the consequence of a "guilty verdict" (like the now defunct Arthur Andersen in the matter of ENRON), which is that claimants will NOT recuperate anywhere near their losses. The result could be also the bankruptcy of the rating agencies as there is only a handful and they all participated (perhaps) in the financial engineering of SIVs.

And, then: The financial markets without rating agencies? Wow, that would result in "the perfect mine field" as regards international bond markets.

Only the lawyers would walk away smiling deeply from such a suit. Regardless of the verdict, they get paid up-front.

[Oupoot]

IMO, this is conspiracy theory in the making - not only were the corporates simply reckless, but that they deliberately falsified information and kept certain information from investors. Never mind that investors always had the option to ask for such information and to use their own judgement as to the quality of the information that were provided to them. Even if it could be proven these corporates deliberately commited fraud, why would investors consider this option if it would potentially destroy their market? If all investors sue the banks, the banks would fail and then nobody will get their money. As it is, the banks' and major mortgage companies' reputations are gonners, what more is needed?

It all sounds more like the writer wants the corporates to pay (US sense of justice / revenge) and dont want to admit all were party to the "fraud". It is more like the old cliche that in order to divert guilt, the mans says: I'm innocent, s/he made me do it...

[baileyman]

This is pretty right on, as far as it goes.

The fraud was all up and down the chain, though. Borrowers faking some docs. Even more brokers encouraging the faking and creating fake docs themselves. Their companies manipulating the loans going into and out of pools for securitization. The bond bankers teasing the companies along with pot of gold expectations, meanwhile draining their blood. The bond bankers skillfully assembling loan pools that became unanalyzable. The bondbankers gaming the rating agencies, known as "rating agency arbitrage". The agencies getting paid by the people they rate, going along to get the revs. The bondbankers designing securities to fit in niches of big buyers' portfolios, but securities the big buyers are unequipped to understand. The buyers' managers getting paid by marking to model rather than marking to market, said model provided by the bondbankers.

Peeling the onion enough, I expect one will find the bondbankers at the center, the creative drive in the whole scheme, surrounded by layers of willing participants.

[bakho]

When regulations fail, lawsuits are not far behind.

What would Ronald Coase do?

[Real Person from the Real World]

This is dynomite, and sounds right on. Thanks for posting it. It still amazes me that the number of mortgages based on a population which is smaller than countries elsewhere, should have such an impact around the world. This is scary, bodes poorly, for the economy. While I would enjoy seeing heads roll, the waves could swamp my boat, along with too many others.

[ken melvin]

A boiling teapot?

[Lafayette]

op: Never mind that investors always had the option to ask for such information and to use their own judgement as to the quality of the information that were provided to them.

You are not familiar with the Truth in Lending Act, evidently.

It is not up to the consumer to presume to know all that is necessary to make a responsible decision. It is up to the professional to assure such.

Given any profession, it is the practitioner who will know how to screw the customer. So, it is evidently the responsibility of the professional to make sure all information has been made available, or they are liable for any ensuing damages.

Despite the article above, predatory credit lending is all about the lack of professional regulation as well as the lack of oversight (on the part of the Fed).

The article is trying to point the finger at who is eventually responsible for negligence. I say the credit institutions are, in part, responsible and they should be made to accept that teaser rates are maintained on the loans that contain them. (And, even roll back those that are forcing default.)

Their losses on such loans will be punishment enough and people will remain in their residences, rather than defaulting. If there are fewer defaults, then there is less negligence for which the creditors are responsible for reimbursement.

Either that, or they may well find themselves open to charges of negligence.

[crack]

I know a guy who was a mortgage broker. He got the MICR font for his computer to print up fake doc to get himself a mortgage that he then sold on up. I'm pretty sure he's not the only one who did such a thing and that he did such things for other people so he could get his origination fees.

I don't doubt that a substantial amount of fraud has been committed.

[Jay]

Pure faith based conjecture. Let me rephrase this for him...

"(I believe), the sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth."

[calmo 's press secretary]

bakho continues to educate me (such a torture for anybody...my condolences in advance)...twas either (wikiCoase) "durable-goods monopolists do not have market power because they are unable to commit to not lowering their prices in future periods." [my 1st guess]

or
"If you torture the data long enough, it will confess." And who could deny such a quip atleast 2nd prize?
Not me.
Can you stand pain? Before you answer, think of the glory afterwards and especially your successful run as Captain of the Universe. (Can you stand this torture of others or do you want to stay with the regular, now that we've got your hopes up as an electable candidate?)

Right.
That's all I can stand...I vote for the 1st one...hoping with all my might, you'll splain it to me.

[Don]

"The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans didn't involve fraud."

He assures us! But on what basis?

Unfortunately for the conspiracy theorists, I certainly don't and didn't see it in the course of having closed several thousand residential mortgage loans over the last decade or so. Admittedly, I am a small sample, and also fraud could have been happening right under my nose w/out me knowing it. But you usually can smell a deal that's a lie, and I personally saw or suspected a few bad deals, but hardly a majority.

There are, however, systemic conflicts of interest in the industry--particularly between the banks and their appraisers, and the bond sellers and the rating agencies. However, anyone thinking of investing, but particularly sophisticated investors like foreign governments and pension funds, should be readily able to discern these conflicts, and appropriately discount them.

I don't disagree though, that Paulson's plan is a bank bail-out more than anything else--just for a different reason. Paulson and the banks want to keep from having the massive mark to market the impending wave of foreclosures will require. It may very well render many of the largest, too big to fail banks and mortgage companies, insolvent (at least technically), which would, of course, mean more dough from the taxpayers. I don't believe Paulson or the bankers care much about what happens to the ultimate owners of the debt (there's been a couple of great stories in the WSJ about this little town in Norway that used its extra dough to buy some U.S. mortgages, and now can't pay its employees), and I don't think they believe the bank's biggest risk is in exposing the fraud. Instead, it is to selling assets into a declining market.

A sidebar on fraud: Washington Mutual recently agreed to pay a fine for some inflated appraisals (I think to the feds, but I can't remember). I chuckle when I see stuff like that regarding appraisals. An appraisal of a piece of real estate is simply an estimate of what a willing buyer would pay a willing seller at the time the appraisal is conducted. It is not a guarantee of anything, and should never be taken as such. (IMO, they are rarely worth the paper on which they are printed.) If an investor relies on an appraisal, particularly one done by an appraiser hired by the bank, and particularly when the appraisal is done for a refinance transaction with no actual buyers and sellers(which most subprime loans are), he's an idiot and deserves to lose his money. If a rating agency relies on the appraisal--done by the hopelessly conflicted appraiser and when there is no real sales transaction--in figuring out a CDO's ratings, then it may not be fraud, but it is certainly negligence and laziness. And I'd agree that there was lots and lots of negligence and laziness to go around.

[kharris]

I cannot speak to the validity of Lafayette's claim that the European press has made no mention of forced mortgage buy-backs. The subject has certainly been mentioned in the US press. It seems to have a rythm. If SFGate can bring the story back, it would be the third pulse, assuming I haven't missed any. I understand that if Paulson's private plan (P3) works miracles, it will reduce the opportunity for forced buy-backs because there will be fewer losses to investors. Short of perfection, I don't see how investors can be dissuaded from suing over falsification of loan documents. The documents were either falsified or they weren't. Losses have already been booked, and some of those losses almost certainly involved loans based on false statements on loan documents. How do investors lose their ability to force servicers or originators to buy the loans back?

To Oupoot, I would only say that bahko has it right. The law has nothing to do with blame in this case. It has to do with contracts. If the investor can convincingly show that the contract allows a forced buy-back, it won't matter who was blameworthy. It will matter, however, who gets there first to claim the money, because there isn't enough to go around.

[barry payne - economist]

"At stake is nothing short of the continued existence of the U.S. banking system."

If it's that bad, forget about the lawsuits. Bush will invoke his emergency powers to suspend all government authority except his own.

Below that, an emergency decision from the Supreme Court would likely fend off such lawsuits on grounds that other sectors of the economy did not go belly up due to low interest rates and lax credit standards.

Indeed, some sectors thrived, so the "Fed policies and subsequent housing bubble" made me do it your Honor doesn't work. A question from Scalia could be, "If it did, why weren't the failures widespread?" (Enter Catch 22 - If the Court allows the lawsuits to proceed, the failures WILL be widespread, big time, so it won't and they won't - see Rule One above by Bush.)

Instead, the Court would likely say something like, "You were all in the boat together as the tide was rising, and no particular entity IN the boat had control over the tide, any more than it did when the tide fell. Defendants are relieved of charges of motive and intent to deceive."

That forces the parties to revert back to traditional civil and criminal standards, for example, the 50% or so of borrowers who qualified for prime loans but were steered (illegally? - buyer beware?) into sub-prime conditions that were far more expensive.

However, even resolving in full, such incremental differences up and down the corrupt supply chain pales in comparison to what Olender is suggesting, which is to extract from some parties by others a huge chunk of the busted bubble unrelated to the individual actions of parasitic money lenders.

[Bruce Wilder]

I think fraud, and probably just as important, a lot of administratively sloppy paperwork, was widespread. It is hard to look at the explosion of subprime and Alt-A lending, and the high rates of near-immediate default, and not know that things were seriously out of control.

The article, above, does seem heavy on general-purpose righteous paranoia, and very light on details, so I would not put much stock in it, per se.

There's a whole range of financial "products" out there, and the issues, including the litigation issues, are going to vary a lot as we move along the spectrum from actively managed SIVs to closed-end CDOs.

[hari]

I like to reiterate the problem of Moral Hazard with the original subprime SIVs - the way they're bundled, packaged and rated - and the role of Paulson when on the Street.

If it's true no media was allowed into the deliberations managed by Paulson - to freeze the rates! - what's the background and explantion for such a policy?

Fed has spoken of the issue of moral hazard and used the term "fraud" in describing some of the marketing gimmies.

Why is it that the "free market" is such a Holy Cow?

If white-collar crooks and their likes and make a buck, they will...in the absence of regulatory control/oversite.

PS. Note UBS (ZHR) took a $10B loss this past week from subprime credit on its books....

PSS. Lafayette is close to the real issue, if it can be (legally) verified that fraud was invloved.

[donna]

It's not the fraud that will kill the financial markets.

It's the greed and stupidity....

[calmo]

So how important izit that the story is sourced SFGate and not WSJ?
Plenty. [I'll let you answer the next one so you don't have a case of MEGO.]
We (regular readers) have certain expectations about the political bent of both these outlets, yes? [the little fiesty lefty, short on documentation and long on rabble-rousing vs The Money]
So the appearance of this article in SFGate is actually a containment --the Money readers having severe cases of MEGO for anything issuing from SFGate. [Ask yerself if you haven't experienced this MEGO or MEBO right here in River City and see if ain't so: you *contain* some tags even before seein em]
Imagine the MEBO (Bulge Out) if WSJ were to use SFGate as a lead and substantiate those claims, the "general-purpose righteous paranoia, and very light on details".
Ok that's all the rabble-rousing I can muster.

[esb]

Those of you who have friends/contacts who are highly-successful and/or prominent members of the "class action bar" need to make a call or two and discuss the Paulson "plan".

What you will find (as I have found) is an unimaginable level of salivation. One player remarked that a single stunning construction flaw will put the servicers into a "knowingly-false" representation trap with respect to investors.

Once these modifications begin to run the only thing that will matter is whether you can get yourself into "first-mover" status.

Let the games begin.

[save_the_rustbelt]

Twice in my lifetime many loan officers have been paid on commission. Twice we have had a catatrophe.

Trend?

Fraud at the consumer level, fraud at the bank level, fraud here, fraud, fraud everywhere.

[Wowsas]

This op-ed is tinfoil hat stuff. And it's frankly pretty stupid.

1) Yes there was massive fraud in the origination of many home loans.
2) This was almost certainly the result of policies that rewarded brokers and originating lenders with higher compensation for higher-yield mortgage products, such as exotic ARMs, etc.
3) There is no reason to believe that the banks participated in the fraud, or encouraged it (other than through their compensation structures).
4) To the extent that banks had any knowledge of said fraud, it was knowledge that investors would also have had, namely anecdotal accounts of fraud, the incentive structure, etc.
5) The banks can, as others have mentioned, rely on the rating agencies' ratings.
6) The banks can also rely on the defense that many of them held MASSIVE amounts of these MBS and CDO securities.

The author betrays I think a fundamental misunderstanding of the banks' role here. They were peddling this shit, sure, but they weren't manufacturing it. The fact that they essentially outsourced the manufacturing process to shady characters isn't enough to indict them, especially when we've learned that banks like Citigroup, WaMu, etc. were also end consumers of this stuff.

The industry that you definitely could charge with fraud-- the subprime broker and origination industry-- is now largely judgment-proof. Sure, you might be able to go after executives and what not, but this'll be difficult. And frankly, as the NY Times article last week on immigrant subprime brokers showed, a lot of this problem revolved around folks looking to make six digit salaries. How do you go after those guys?

The problem here was totally about unregulated industry, and misaligned incentives. But this whole idea that foreign investors can come sue the Citigroups and the Merrills based on fraud, when any such fraud is not attributable to the banks, and/or is also well known among all parties (no doc and low doc loans were a well known phenomenon) is patently ludicrous.

[Patricia Shannon]

I'll continue to keep my savings in savings accounts, CD's, etc.

[nocountry]

I spoke to a number of mortgage bankers who visited us here at Harvard Business School.

It seems certain that some banks were selling products to clients that they themselves believed to be mispriced. In fact, one banker even said that he believed the primary reason for the creation of subprime-backed synthetic CDOs was to give Wall Street a mechanism to go short subprime.

Several banks had substantial shorts on subprime going into the summer.

So does this mean that the banks committed fraud? I don't think so.

First, the banks many have suspected that subprime was going to go bad, but they by no mean knew it for certain. Several presumably knowledgeable firms such as Citi got it very wrong.

Second, the banks' bearishness on subprime was driven by widely known public facts, such as the unjustifiable run-up in house prices prior to 2005 and the prevalence of teaser rates and no-doc loans.

Third, the banks were selling to sophisticated investors who had access to the same information as they did and should have known better. To the best of my knowledge, the widows and grandmothers of America were generally not buying equity tranches of subprime-backed ABS.

If a fund manager believes that a AAA-rated ABS which yields 100bp over treasuries carries no default risk, he is a fool. You know what they say about fools and their money.

[gordon]

I'm having trouble putting up a comment with a hotlink in it. Does the spam filter have a problem with hotlinks?

[Robinia]

The "real" story, huh? Ah, but the real story is very, very complicated-- certainly more complicated than this conspiracy theory version. Which is not to say that fraud is/was not a big problem in this complicated story. And, agree w/Bruce Wilder-- a lot of just sloppy bad work accompanied the outright fraud, slightly immoral activities, and other general expressions of industry-wide greed and poor character.

Can see that the Paulson approach might well be looking to have the US intervene in contractual arrangements in such a way as to put the government in the way of the otherwise-ineivtable foreclosures and mark-to-(declining)market. Looking to preclude at least some of the messy legal machinations likely to come as folks look frantically for somebody to blame. Just as everyone in the industry was looking to put risk "away" from them somehow as the toxic waste grew, sticking it to the next guy, so, now, everyone will look to the government or the courts to make them whole by looking for somebody to blame. Sean Olender, too.

Blame makes no product. We are here, in this together. We'd best sober up and take stock of the complicated mess we are in, and take the tack of one of my very favorite books:
"This mess is so big, and so wide, and so tall, there is no way to clean it, no way at all!" And, then, the Cat in the Hat pulled something out of his hat....

[Lafayette]

wowsas: There is no reason to believe that the banks participated in the fraud, or encouraged it

Hook, line and sinker

There is EVERY reason to believe so.

The mortgage brokers where independents who were "working" the real estate agents, the first point-of-contact with the customer. These two "agents" aided and abetted the "hooking" of the client.

The brokers then turned around to the finance institutions to "offer their catch". Meaning, they scoured both banks and other credit institutions towards getting the "best deal".

What happened is that these latter (banks and credit institutions) started relaxing the conditions for obtaining the credit -- because "everybody was doing it".

This is a classic frenzy mentality. And the banks were indulging themselves hook, line and sinker to get their "catch".

[cms]

Yeah, not gonna happen. Were these securities sold with a put option, as we've seen in the SIV fiasco at C? No, so how does any purchasing institution get 100% of face. They don't, end of story. Nice little sky is falling editorial though.
Seriously, highest level of Wall Street were aware of the fraud? BSC was a huge player, they ran an internal hedge fund levered 10:1. In other words a 10% drawdown in the underlying securities would wipe out the entire fund. And so it did. They were aware? Everybody's favorite Irishman, Stan O'Neil? America's royalty, Citi's Prince? Really no, they were stupid, should have known better... But not complicit in fraud. Anyone expecting this ed's predictions to play out is a laughable conspiracy theorist.

[Lafayette]

cmw: But not complicit in fraud. Anyone expecting this ed's predictions to play out is a laughable conspiracy theorist.

Bollocks.

They knew the debt was "soft". They did not realize that a weakening in realty market prices would devastate that underpinning. They did not imagine the downdraft in market prices, presuming, at worst, prices would only "level off". Debtors thus found themselves in negative equity positions by the barge-load.

The Masters of the Universe should have known (the implicit risk to SIVs); that's what they are paid for. But, no, they were focusing on their stock options and not their responsibilities.

So, they are falling on their swords ... and rightly so. All that will be shattered is their pride, when they should be in jail for gross negligence.

[dug]

If only such suits were brought and would prevail but alas law has never quite delivered on equality under the law so while the common man, without friends in high places or the federal reserve to socialize his malfeasance, would clearly experience legal consequence for such outright fraud the odds of any of the perps taking a fall on this one are virtually zero.

I think the real reasons banks agreed is that the fed promised further rate cuts to try and prevent the need for ARMs to ratchet up, and since there are already so many foreclosures on the market blowing another 10% or more out of their homes would lead to further losses for the banks trying to sell off the seized collateral. It's much more palatable to lose a little on interest than have to take a 20% writedown of the full amount.

[calmo]

SFGate is getting more credible with each passing day, yes?
The resetting ARMs foretelling of yet higher rates of default and even smaller revenues from income streams the investment banks with their models were counting on to produce like it was 2005. Not to mention other real estate investments or related commercial real estate investments whose values are falling from those stratospheric levels.
So far this TAF bit looks like a strategy to get the investment banks past the year end looking respectable...a way to delay the massive writedowns for the collateral, which may be worth more later. But a few months of $40B will only see a continuing drying of those mortgage based revenue streams, lower (just not low enough) house prices and quite possibly higher mortgage rates, yes? (you wanna lend your hard earned money to these suspects?...in these suspect times?) So TAF might buy time and liquidity in the short term --while rebuilding the entire edifice gets under way...I can hear BB tapping away with the plan right now, you?

[Lafayette]

dug: the odds of any of the perps taking a fall on this one are virtually zero

I quite agree.

The plutocracy is ensconced, and we are paying the price of it, in a privation of both personal and financial liberty.

"All people are created equal", but that is not the way they finish. Income Inequality makes sure the outcome is extremely diverse in America.

[Peter]

I was a loan officer/mortgage broker from 1994-2007. To my knowledge during that timeframe I had 2 borrowers foreclosed on. I am proud of that record.
Early on, I was taught the simple fundementals of subprime lending. First was the "3 Cs"; Character, Capacity & Colateral. Second was to never make a loan that did not have a definable FINANCIAL advantage to the borrower. These rules defined subprime. If a borrower was damaged in one of the 3 Cs, there was a loan there, damage in 2 made a unlikely deal, damage in all 3 was a show stopper, and a borrower who had nothing to gain also had nothing to lose and was not a good risk. During the last 2 years I was in the business I noticed some very disturbing trends. They were the reason I got out.
The first problem was a complete disregard for the actual value of "Colateral". In "old school" subprime, a house was not worth what some idiot was willing to pay for it, it was worth what we could get for it if we had to foreclose. We would never allow a valuation gain of more than 10% in a year without significant physical improvement to the property (not new paint and carpet), and the standing rule was 75cents value gain for every dollar of cosmetic improvement(including kitchen and bath upgrades). When we began to ignore realistic collateral valuation, we started the water filling behind the dam.
The second problem was degradation of "Character" qualifications. I came into this business before credit scoring. We made judgements on the likelyhood of mortgage repayment on patterns of behavior. Borrowers needed confirmable 2 year mortgage or rental histories, and these counted for the majority of the decision making process. If a borrower was responsible on the payments for shelter, there was a loan there. The worse the pattern of lates, the less the LTV available. Credit scores are not reliable. I have seen spreads of 100 points between scores on the same borrower with the same information. When a credit score that often included nothing more than credit cards and car payments (sometimes not even the borrower's) became the decision factor, the water started to top over the dam.
The third problem was was letting go of "Capacity". 100% Stated Income/Stated Asset loans are suicidal. Especially to a subprime borrower. If you put someone into a loan that there is no rational expectation that they can pay, they won't. Period. That started the erosion of the dam itself.
Finally, ignoring FINANCIAL BENEFIT TO THE BORROWER so that commissions could be made and loans could be packaged and resold was stupid beyond belief. Moving someone into a new home with twice the mortgage payment because it is "nicer" or giving a huge amount of cash to a known irresponsible borrower for frivilous spending, while ignoring the "3 Cs" was dropping a dynamite charge behind a flooded, eroding dam.
Subprime borrowers are not the problem. They were always stupid with their financial decisions. The qualification/processing/underwriting process was meant to protect the system and the banks from excess risk. We ignored lending fundimentals. We now have a wall of floodwater rushing down the valley. We created it, we deserve it, and we can't stop it. All we can do is survive it and clean the shit out of our basements after it is over.

Your rational responses are welcome at PSGute@aol.com

[Madame_Karnak]

If you really want to know the TRUTH...go to the website above and read about the Reagan protocols and the WANTA story. (it is in the wanta archives)

After you read it and before you withdraw your money, send $5.00 to the only editor in the world with large enough cojones to tell the truth despite threats on his life and livelihood, Christopher Story.

We need to demand an end to the rampant corruption of our system by people like the Rockefellers, Rothschilds and the entire Fed cabal. We also need to demand a return of all the money stolen from us by the illegal and unratified creation of the Federal Reserve. Then we need to restructure our entire government to prevent any similar consolidation of power again.

After 4 years of researching what has happened, I am appalled and repulsed at the human toll attributable to the actions of avaricious (and incredibly rich) men. They already had everything and it wasn't enough. They needed it all. Their ultimate solution to the problem of what would they do if the public ever discovered their misdeeds? Does the term, "Final Solution" mean anything to you? Just research sunshine-project.org and peruse the amount of money being spent on bioweapons, non-lethal weapons etc. and you will know which way that things were headed.

MK