The mortgage freeze

[UWdude]

A bunch of risky mortgages are sold and resold, bundled up into CDO's to alleviate the risk, bringing them up to prime, low risk bundles.

The law states there had to be a pen to paper signature, and analysis, "securitization", making sure the mortgages were legit, and the information in them was legit.

But the bankers didn't need no stinkin' laws. So they brought in MERS, "mortgage electronic registration systems", which did the signing electronically, so these bundles could be sold without what would be a huge middle man cost in fees securitizing each individual mortgage before it was sold and resold.

Then some people started to fight their evictions, and started to win.

And, as is so typical when it comes to the banksters, suddenly a law was on Obama's desk, passed by house and senate with voice vote, to give the banksters retroactive immunity for their fraudulent ways. Obama "pocket vetoed" it. At the same time, Bank of America froze all foreclosures in 50 states, and other major banks did the same in 23 particular states.

Call me a conspiracy theorist, but Obama is going to sign that bill into law within 2 months after Nov 2.

In the meantime, 1.4 quadrillion in debt still hangs like an ominous thundercloud over the heads of all Americans.

[A.A. Alfie]

Just curious, did they debtors keep up to date with their mortgage payments?

[jhunter1163]

I always have to chuckle when I see numbers like $1.4 quadrillion bandied about. If that were true, there'd be so much inflation that a Big Mac would cost $3,000.

[Tero]

Money is an illusion.We only think it exists. It's a conspiracy!

[Aepervius]

In the meantime, 1.4 quadrillion in debt still hangs like an ominous thundercloud over the heads of all Americans.

The actual debt is 14 trillion. I could be wrong, but using 1.4 quadrillion (100 time the current US debt) you are almost certainly conflating some future potential debt (or something) with the current debt, like for example somehow calculating what the pension cost will be for people living today or something.

If i am right, this is a terrible way to calculate a debt.

[UWdude]

The actual debt is 14 trillion. I could be wrong, but using 1.4 quadrillion (100 time the current US debt) you are almost certainly conflating some future potential debt (or something) with the current debt, like for example somehow calculating what the pension cost will be for people living today or something.

If i am right, this is a terrible way to calculate a debt.

the 1.4 quadrillion is the amount of toxic assets in CDOs and CDS

debt is 13 trillion

deficit is 1 trillion

[Modified]

the 1.4 quadrillion is the amount of toxic assets in CDOs and CDS

4 million dollars per US citizen? I know these mortgages were "sold and resold", but each bad mortgage would have to have been sold about 100 times over to get to that amount.

[Aepervius]

the 1.4 quadrillion is the amount of toxic assets in CDOs and CDS

debt is 13 trillion

deficit is 1 trillion


Colour me sceptical of this assertion. What is your reference ?

[drkitten]

4 million dollars per US citizen? I know these mortgages were "sold and resold", but each bad mortgage would have to have been sold about 100 times over to get to that amount.

Does reselling a mortgage even work this way?

I mean, if I'm paying off a $250,000 mortgage, I owe $250,000. If Bank A sells it to bank B who resells it to bank C who resells it to bank D who resells it to bank E who resells it to bank F, I still only owe $250,000. While bank F may be holding the bag for a bad debt, banks A-E no longer have any interest in the mortgage; they were off the hook as soon as the check cleared.

It doesn't seem to me that it would matter how often the debt were resold; it's still just one debt.

[Aepervius]

4 million dollars per US citizen? I know these mortgages were "sold and resold", but each bad mortgage would have to have been sold about 100 times over to get to that amount.

Which is why that quadrillion number I see floated around make me very skeptical. Even counted against the world population that would be 230.000 $ per human being.

[drkitten]

the 1.4 quadrillion is the amount of toxic assets in CDOs and CDS

At its peak, the world issuance of CDOs was about a half trillion dollars per year (in 2006). (http://en.wikipedia.org/wiki/Collateralized_debt_obligation)

To issue 1.4 quadrillion dollars in CDOs would thus require at least 2800 years.

I guess now we know what caused the fall of Rome, huh?

[UWdude]

The issuance of CDO's and CDSs does not require the selling of mortgages if the CDOs are cut and bundled like mutual funds, "to reduce risk".

When someone buys a share of a mutual fund, they are creating an extra layer of money that doesn't really exist. They do not technically own any stock, they own a derivatives of stocks.

But CDO's were then being divided into tranches, and then sold again into other CDOs, not to mention there were also CDS's being bought for these CDO's. This could happen many times.

and yes, $1.4 quadrillion is an estimate of how big the worldwide derivatives market alone is "worth".

If real estate prices plummeted 50% over the next 5 years, I am sure $700,000,000,000 of lost so-called wealth is not even that unbelievable of a number. So everything is all good as long as everyone continues to pay their mortgages at the rates and prices specified. But if there are massive foreclosures, the values of those mortgages in this market plummets greatly.

The problem with bundling, cutting, and reselling derivatives is that if the base debt which was bought stops being payed by the house owner, then it hurts the value of all the derivatives as well. BE it directly via CDO or indirectly via which ever company sold the CDS' for the CDO's. In the end, somebody has to cover that loss, and the losses all the way down the chain.

At its peak, the world issuance of CDOs was about a half trillion dollars per year (in 2006).

its not just CDOs, it is also CDSs and other financial instruments.

[KoihimeNakamura]

Not all of that is toxic

[Modified]

If real estate prices plummeted 50% over the next 5 years, I am sure $700,000,000,000 of lost so-called wealth is not even that unbelievable of a number.

You're missing three zeros there.

[drkitten]

and yes, $1.4 quadrillion is an estimate of how big the worldwide derivatives market alone is "worth".

Not all derivatives are CDOs or CDSs. Not all assets held in CDOs and CDSs are toxic.

So pointing at the total volume of stock options and pork belly futures as though they're somehow related to the mortgage freeze at best a lie and at worst an indication that you have no idea what a "derivative" actually is.




its not just CDOs, it is also CDSs and other financial instruments.

And, if we're talking about "the worldwide derivatives market," we're also talking about warrants, convertible bonds, stock options, currency swaps, forward rate agreements,.... a whole bestiary of things that have nothing to do with mortgages or real estate.

[Francesca R]

Does reselling a mortgage even work this way?

I mean, if I'm paying off a $250,000 mortgage, I owe $250,000. If Bank A sells it to bank B who resells it to bank C who resells it to bank D who resells it to bank E who resells it to bank F, I still only owe $250,000. While bank F may be holding the bag for a bad debt, banks A-E no longer have any interest in the mortgage; they were off the hook as soon as the check cleared.

It doesn't seem to me that it would matter how often the debt were resold; it's still just one debt.This is correct. CDOs are not derivatives (which does not mean they can't be junk)

[Francesca R]

and yes, $1.4 quadrillion is an estimate of how big the worldwide derivatives market alone is "worth".Rubbish. Curious how you don't report official data. Maybe you think its a conspiracy. December 2009 BIS survey (http://www.bis.org/statistics/derstats.htm) Overview (PDF (http://www.bis.org/statistics/otcder/dt1920a.pdf))

Notional amount outstanding: USD 614.7 trillion (note this is not "worth")

Gross market value: USD 21.5 trillion (this is also not "worth")

The net P&L on the entire thing is the worth of the whole thing (which is not shown). Notional amounts sound scary but generally vastly inflate true market risks. I can have $200m of notional currency exposures by being long $50m/short yen to 29 October and short the same to 1 November. And all I would be doing would be borrowing yen / lending $ over next weekend, so all I would be exposed to (apart from the credit of the counterparty) would be fluctuations in overnight interest rates.

[soylent]

Accurate data for the worth of those CDSs isn't available since they're over-the-counter products. It's essentially just gambling contracts masquerading as insurance.

Most of this is netted; so that entity B is a seller of a CDS to entity A and a buyer of the same CDS with slightly different terms from entity C. The problem is not as large as the notional value because not all underlying assets will go bad and due to netting B just pays C with money it gets from A and everything is good, assuming C can pay.

If C goes bust, like AIG, A and B may try threatening the end of the world unless C gets bailed out. If they don't succeed in robbing the tax payer, they might go bust too; B can't pay A, A doesn't get paid and loses the ability to use those CDSs as insurance. The netting could conceivably unravel, causing serious losses to some institutions. This is largely what all the talk of counterparty risk in 2008 was about.

[stevea]

Just curious, did they debtors keep up to date with their mortgage payments?

I heard a stat that on average they were ~450 days behind on payments. So far there are no cases of people who are current being foreclosed. The primary issue is that some banks have erroneously asserted "standing" in court whereas the mortgage obligation had been transferred.

Freezing foreclosures is a great way to stall the housing market and kill the economy. If a bank can't collect the collateral after clear default it means an end to the mortgage lending system. Still that's exactly what pandering politicians will want - welcome to Deadbeat Nation.

Maybe Peggy Joseph was right !
http://www.youtube.com/watch?v=P36x8rTb3jI

[Random]

I heard a stat that on average they were ~450 days behind on payments. So far there are no cases of people who are current being foreclosed. The primary issue is that some banks have erroneously asserted "standing" in court whereas the mortgage obligation had been transferred.

Freezing foreclosures is a great way to stall the housing market and kill the economy. If a bank can't collect the collateral after clear default it means an end to the mortgage lending system. Still that's exactly what pandering politicians will want - welcome to Deadbeat Nation.


I have read stories wher not only did banks try to forclose on people who were current on thier mortgage, but they tried to forclose on houses where there was no mortgage in the first place.

While I do not believe that someone who takes out a loan he has no ability to repay should get a free house, we cannot ignore the fact that a lot of the paperwork behind these mortgages is a thin tissue of lies.

[A.A. Alfie]

I heard a stat that on average they were ~450 days behind on payments. So far there are no cases of people who are current being foreclosed. The primary issue is that some banks have erroneously asserted "standing" in court whereas the mortgage obligation had been transferred.

Freezing foreclosures is a great way to stall the housing market and kill the economy. If a bank can't collect the collateral after clear default it means an end to the mortgage lending system. Still that's exactly what pandering politicians will want - welcome to Deadbeat Nation.

Maybe Peggy Joseph was right !
http://www.youtube.com/watch?v=P36x8rTb3jI

I think what you omit to mention is that if people had maintained their mortgage repayments AND the bank had been allowed to realise on the delinquent debtors, the asset would not have become toxic.

I'm not defending the banks here either, but I would like to make sure the bigger picture is being kept in view. The cause of the problem was many faceted.

I have read stories wher not only did banks try to forclose on people who were current on thier mortgage, but they tried to forclose on houses where there was no mortgage in the first place.

I find this very hard to believe (I'm not saying I don't believe you), can you locate these articles?

[drkitten]

I find this very hard to believe (I'm not saying I don't believe you), can you locate these articles?

Here's one such reported case (http://www.bloomberg.com/news/2010-10-08/man-who-had-no-mortgage-faced-foreclosure-anyway-ann-woolner.html):


Jason Grodensky paid cash for a South Florida home last December. With no mortgage and full ownership, he had no fear of foreclosure.

And yet, Bank of America foreclosed on the house seven months later, according to the South Florida Sun Sentinel. The court-ordered foreclosure took place July 15.

Obviously an isolated incident, but still worrisome. Proving that there's a mortgage on the property should be a routine part of any foreclosure proceeding and should not be skipped under any circumstances.


His case is probably rare. But the mortgage industry’s cavalier attitude toward rules and record-keeping is too common, too systemic, too long-running and too damaging to be sure of that. And in any case, it can’t be called mere technical error.

[drkitten]

BTW, here's an example of BoA trying to foreclose on a couple who are current on their mortgage. (http://consumerist.com/2010/08/bofa-tries-to-foreclose-on-couple-with-current-mortgage.html)


Even though they have made every payment in full and on time, Bank of America sent one couple a letter asking them for the deed to their house.

The "deed in lieu of a foreclosure" would save them from the hassle of foreclosure, the letter said. Bank of America offered the baffled homeowners $3,000 to help them move. They would lose all equity in the house.

Bank of America said sending the letter was an accident, the folks were completely current on their mortgage, and they would be looking into what caused the error.

BoA doesn't come off looking very professional, does it?

[Newtons Bit]

The actual debt is 14 trillion. I could be wrong, but using 1.4 quadrillion (100 time the current US debt) you are almost certainly conflating some future potential debt (or something) with the current debt, like for example somehow calculating what the pension cost will be for people living today or something.

If i am right, this is a terrible way to calculate a debt.

Maybe he's using metric dollars? :confused:

[Corsair 115]

IWhile I do not believe that someone who takes out a loan he has no ability to repay should get a free house...


Shouldn't that be "someone who takes out a loan he has no ability to repay at that rate of interest"? My understanding is that was the key problem with subprime loans—they offered a low interest rate at the start, but then after a few months or years the rate skyrocketed. A fact which was buried in the fine print of the mortgage and which the broker or bank did their best to downplay or outright ignore.

[Mr.D]

I find this very hard to believe (I'm not saying I don't believe you), can you locate these articles?

Here's a couple (http://www.staradvertiser.com/news/hawaiinews/20100725_Foreclosures.html) of articles (http://www.staradvertiser.com/news/hawaiinews/20100711_Loan_program_fails_island_homeowners.html )

[keale]

Shouldn't that be "someone who takes out a loan he has no ability to repay at that rate of interest"? My understanding is that was the key problem with subprime loans—they offered a low interest rate at the start, but then after a few months or years the rate skyrocketed. A fact which was buried in the fine print of the mortgage and which the broker or bank did their best to downplay or outright ignore.


Ive been in the industry and these are called ARMs or adjustable rate mortgages. Starts off at a low rate and after a period of time 2-5 years would adjust to usually much higher rates depending on several factors. So you could see your payment double when that adjusts.

Giving a homeowner more than they could handle was standard practice. The majority of home buyers have little to no understanding of the different lending products and the ramifications of each one. This was a cycle that fed into itself. The larger the loan the more money for the bank the more money for the realtor mo money mo money mo money. Tell em that they qualify for a low interest rate and the the standard shpeil was " dont worry sir in 5 years we can refinance you again" which was true until the inevitable collapse.

[drkitten]

Shouldn't that be "someone who takes out a loan he has no ability to repay at that rate of interest"? .

In a lot of cases, it's literally "he has no ability to repay."

Look up the infamous NINJA loans -- "No Income, No Job or Assets." Even in the industry, these were called "liar's loans." The idea is (was) literally that it didn't matter if the borrower could repay the loan, because the bank would still have the ever-appreciating house. (Or more likely, because the person to whom the bank sold the loan would still have the ever-appreciating house, and the bank would still have the proceeds from selling the loan to the securities market.)

[keale]

In a lot of cases, it's literally "he has no ability to repay."

Look up the infamous NINJA loans -- "No Income, No Job or Assets." Even in the industry, these were called "liar's loans." The idea is (was) literally that it didn't matter if the borrower could repay the loan, because the bank would still have the ever-appreciating house. (Or more likely, because the person to whom the bank sold the loan would still have the ever-appreciating house, and the bank would still have the proceeds from selling the loan to the securities market.)


The banks have no one to blame but themselves and they know it. Its just that at the time no one saw a problem because everyone was fat and happy. Think about it you could give anyone a loan and your making money and not just a little money I know guys that went from driving a Ford to driving a Ferrari.

[lomiller]

Ive been in the industry and these are called ARMs or adjustable rate mortgages. Starts off at a low rate and after a period of time 2-5 years would adjust to usually much higher rates depending on several factors. So you could see your payment double when that adjusts.

Giving a homeowner more than they could handle was standard practice. The majority of home buyers have little to no understanding of the different lending products and the ramifications of each one. This was a cycle that fed into itself. The larger the loan the more money for the bank the more money for the realtor mo money mo money mo money. Tell em that they qualify for a low interest rate and the the standard shpeil was " dont worry sir in 5 years we can refinance you again" which was true until the inevitable collapse.

While I agree, I think there is a point you are missing. Lenders frequently went to considerable lengths to hide the fact these mortgages were adjustable, something that is illegal in the US. The problem is that while illegal the only recourse is to have the mortgage agreement cancelled, something that does you no good unless you can’t get another mortgage because you still have to give the bank back the money they lent you.

[TraneWreck]

I have a few points on the subject of who is primarily responsible for the mortgage mess:

First, the commercial foreclosure rate has been close to as bad as the residential mess, it just hit a little later.

Here's an article describing the commercial foreclosure rate tripling in New Jersey in one quarter:

http://www.nj.com/business/index.ssf/2009/07/commercial_foreclosure_rate_tr.html

So this crisis was not isolated to people taking out mortgages they couldn't pay.

Second, I have a serious problem with the financial industry as a whole. Financial planners and other professionals dealing with mortgages hold themselves out as experts, but unlike doctors and lawyers, for example, there is no bar exam nor is there a serious ethical board.

Yet the public views planners like they do doctors and lawyers: here are the experts, I'll let them tell me what to do.

Thus, back when the floodgates were open, a family goes to a bank looking for a mortgage to purchase a home. Responsibly, they should aim for a $200,000 home, but the bank tells them they're good for $500,000 (I worked on a case with basically those numbers).

The people looking for the loan were reasonably intelligent, college educated professionals with quality jobs. They thought, "hey, if this bank says that's what we should do, we should go for it. They looked at our finances and salaries and thought a $500,000 loan was a reasonable investment, they're the experts."

It's like going to a doctor who asks you, "how much pain medication do you want?"

"As much as is safe to give me. You're the doctor, you tell me."

If a doctor prescribes an unhealthy amount of medication, they suffer ethics complaints or, more likely, lawsuits. What happens to the financial planner? Not a damn thing. They take their commission and move on.

I think one of the main sources of this mess, significantly more so than just blaming it on irresponsible people, is that there was an entire industry that held itself out to the public as professional experts like doctors and lawyers, but in actuality it was a lot of unqualified people looking to make some money.

Obviously, as a lawyer, I make money from my clients, but it is very much against my economic interests to give them terrible advice as I could lose my license and get sued. What penalty have these banks and planners that gave out these idiotic loans paid to the clients themselves? If I did a ****** job and landed a client in prison, they could recover directly from me.

Now, obviously there are responsible, quality planners out there, but scapegoating the mortgage-holders as immoral and irresponsible glosses over the structural problems--most of which were only superficially dealt with in the finance bill.

Planners and bankers handling mortgages and other sensitive financial issues need a bar exam (not some sham licensing test that they pass after a 2-day seminar) and a legitimate board of ethics.

/end rant

[Last of the Fraggles]

Thus, back when the floodgates were open, a family goes to a bank looking for a mortgage to purchase a home. Responsibly, they should aim for a $200,000 home, but the bank tells them they're good for $500,000 (I worked on a case with basically those numbers).

The people looking for the loan were reasonably intelligent, college educated professionals with quality jobs. They thought, "hey, if this bank says that's what we should do, we should go for it. They looked at our finances and salaries and thought a $500,000 loan was a reasonable investment, they're the experts."



I have a degree of sympathy but to be honest not a great deal. Banks are commercial enterprises not public services. The offer is that we are prepared to offer you 500k if you want under the agreement that if you can't pay it we take the house back. It's very different to recommending that you take a 500k loan.

If someone of reasonable intelligence takes a loan then you have to expect that they do their own homework of what they can afford.

If you went into Best Buy and asked 'what TV should I buy?' and they recommend a 100" gold plated plasma at $50,000 who is to blame if you buy it?

Where material facts are being hidden then that's another matter but when people can't be bother to take responsibility for their own finances then they can hardly complain if things don't work out like they want.

[TraneWreck]

I have a degree of sympathy but to be honest not a great deal. Banks are commercial enterprises not public services. The offer is that we are prepared to offer you 500k if you want under the agreement that if you can't pay it we take the house back. It's very different to recommending that you take a 500k loan.

I'm a commercial enterprise as a lawyer in the sense that people pay me for my services. I could not behave that way and expect to continue being a lawyer.


If someone of reasonable intelligence takes a loan then you have to expect that they do their own homework of what they can afford.

If you went into Best Buy and asked 'what TV should I buy?' and they recommend a 100" gold plated plasma at $50,000 who is to blame if you buy it?

Where material facts are being hidden then that's another matter but when people can't be bother to take responsibility for their own finances then they can hardly complain if things don't work out like they want.

It has everything to do with the importance of the activity. We have learned that unethical behavior by lenders can literally destroy the economy. Doctors and lawyers operate in professions that, were they not strictly supervised, could quite easily do the same.

My argument is that we have a little bit of history that proves giving out mortgages and dealing with people's retirement funds is more like being a doctor or a lawyer than selling electronics at Best Buy.

In other words, a financial planner or lender should not be trying to talk someone into the most expensive product, they should be behaving as a fiduciary and explaining what is in the best interest of the client. If the client then does something stupid, that's their fault.

Part of my argument was also about the way society views lenders. No one views the pudgy dude in the slacks at Best Buy as someone worthy of handling deeply important matters. We ask them about tvs.

People wrongly view lenders and financial planners like they do doctors and lawyers.

So, I would rather raise the standards of the profession, but another alternative is a disclaimer or some other method of making it very clear that these guys are just trying to make a buck and have no real expertise. Those institutions and individuals that considered themselves of a higher calibur could voluntarily sit for toughter competency tests and form an ethics board that they submit to.

[keale]

While I agree, I think there is a point you are missing. Lenders frequently went to considerable lengths to hide the fact these mortgages were adjustable, something that is illegal in the US. The problem is that while illegal the only recourse is to have the mortgage agreement cancelled, something that does you no good unless you can’t get another mortgage because you still have to give the bank back the money they lent you.


Oh I agree Ive seen documents outright fabricated and anything to push each loan through. Not just loan officers either ive seen stuff come back where all of a sudden debt to income ratios magically changed on the docs among other things. Not saying everyone was doing this but it sure as hell wasnt uncommon since it was talked about openly among people in the mortgage industry.

[Mr.D]

Another article (http://www.staradvertiser.com/business/businessnews/20101013_Robo-signers_were_no_experts.html) discussing another of the questionable mortgage practices by lenders.