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Dirty Little Secret About the Mortgage Crisis

Few people realize that many of the home builders also owned and operated their own mortgage and title companies.

Of course, these home builders had a vested interest in making sure all their sales for homes were approved for a mortgage.

Now you might ask, why would the government allow such a conflict of interest... can anyone say, home builder lobbyists?

People have no idea how very bad this whole thing is going to get.

I've been predicting it for the past two years and what's happening currently is just the tip of this vast iceberg.

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My rant on "victims" of mortgage fraud:

I hope that our time in the RP campaign has taught us that the media will spin things in any way they want. Every day we hear the talking heads babbling on and on about the "victims" of the mortgage crisis. This is likely to pave the way for our all-knowing big brother government to take over yet another aspect of our lives.....

From my personal, up-close experience that "mortgage fraud victim" line that you keep hearing from the media is simply not true. I deal with these properties and their "occupants" on a pretty much daily basis.

Here is what I've seen personally: The overwhelming majority are the BUYERS OWN FAULT for signing on for more loan than they could afford. People talk about applying for stated-income loans where the loan rep changed the numbers......Yet the buyer still signed it. They KNEW they were signing fraudulent docs and did it anyway. Those folks are just as guilty as the corrupt loan reps. Not victims. When 15 banks turned them down then someone told them they can get "anyone with a pulse" approved for a mortgage.....You GOTTA know something's not right with that loan rep.

Next largest group would be those for whom divorce/death/major illness was an unexpected (and unprepared for) event. When people over-buy, they wind up with zero savings as a back-up plan. Seems that everyone expects "someone" to bail them out if something goes wrong...No rainy day fund AT ALL. They want to own their dream home no matter what.....Gotta keep up with the Smiths and Jones. I live in a small home that I can comfortably afford; not new, not big, but within my budget. I really don't want to bail out someone that lived in a McMansion and wasted all of their disposable income on the latest gadgets and electronics instead of purchasing basic life or disabiliby insurance. I live BELOW my means; I don't want to pay for those that live ABOVE their means......Something fundamentally unfair about that to me.

Third group: Really stupid home equity loans. "Hey honey, lets' get a home equity loan and pay off all of our credit cards......Then go charge them back up." These were folks that owned their homes outright (or very close to it) but decided that they "deserved" to take that round-the-world-trip, that new car, or paying for that $20K dream wedding for their daughter. On a few occasions people would actually take out these loans to make improvements to the house......Then try to be cheap and do it themselves so it looks like total $h1t; whoever winds up buying from the bank it has to demo then re-do the crappy do-it-yourself improvements. These are self-inflicted foreclosures.

I have seen a very few instances where I truly felt sorry for the people, but most times that I've seen it was caused by laziness (can't bother to actually read those docs or take them to an attornty for an interpretation), irresponsibility (no one needs to plan, the government will bail us out), greed (self explanatory), or some combination of the above.

Most recent actual victim was a victim of our US Immigration policy. The homeowner had lived & worked here legally for over 10 years; then was notified that her visa was not being renewed. She could leave voluntarily or be deported. This particular homeowner had a stable job, owned a home, contributed to the community. Victim?....Sure, I'll go with that one.

Just my experience, but hey, I'm only in the biz so what do I know? I won't say that there are no "victims" out there.....I'm just saying that in 10 years of doing this, I haven't found a great number of blameless people going through these foreclosues.

Sorry for the long post, but thanks for reading.

Welcome to the New America: Where everyone is a victim and no one is responsible for their own actions...........

Excellent rant.

Excellent rant.

While 80% of ARMs are yet to reset

and the exposure on the mortgage scams is intense, there is also a growing default rate on construction companies that build high rise offices, condos, etc. This is just starting to come into play. All of this will cause the $500 trillion dollars in derivatives that US banks have to begin to unwind. A collapse of even 3% of this will exceed our GDP. When this unwinds, hyperinflation is just around the corner. I have been ordering cans of freeze dried foods for years. A little each month adds up. I am accelerating my purchases here. I am also VERY well armed and have silver and gold. This is going to get very very bad.

I agree

food and housing is going to be a big problem. I believe this generation is going to experience what no other generation has.. not even those who lived through the Great Depression.

I wonder if those who are voting for McCain, Romney, Huckabee, Clinton and Obama will have any regrets when they are looking for a crust of bread to feed their family?

McCain and the other won't have to worry about fighting hundred year wars and staying in Iraq for the duration.. there will be no money left to finance our empire. China will have dumped the dollar by then and will no longer loan us any more war money.

We will have to look to the UN for protection... not a pleasant thought.

Maybe then these people who mocked Ron Paul will realize what he was trying to tell them, but of course, it will be too late.

I am beginning to believe

that there will be a drastic unwinding of the economy before the November elections. If this happens, severe economic disruption may prove the catalyst for suspension of the Constitution and the implementation of martial law. IF this happens, I believe there will be no elections.

The bond insurers are getting downgraded too. One already

has.....and that's going to send ripples, or waves, everywhere; not just mortgage backed securities, but all kinds of bonds including muni(s).

The Banks Knew

The banks knew they were making bad loans and also knew the Gov't would come to bail them out.

The only Gov't that can intervene is local, here's how:

The mayors can refuse to use the police for eviction purposes while encouraging citizens behind on crooked loans to stay put and forcing the banks to re-negotiate.

It can be done. It should be done. Can we get a mayor to step up?

Reverse this scenario....

Suppose that YOU owned a property that you agreed to sell to someone on terms.

They pay you the agreed-upon monthly payments for a while then one day just quit paying.

You still have bills to pay every month and NEED that payment to pay your bills.......Now you are told that you will not be able to reposess the property because the buyer is a "victim" of a bad deal and will not be evicted.

Get real....There was a contractual agreement between 2 parties and one of them dropped the ball. Why would you ask government to take sides? I guess it depends on which side you're on, doesn't it.?

TRY 417,000

Cactus you are living in 1999. Were did you get that number? That was back in the day of 80,000 dollar homes.

"Loans above $227,150 do not conform to Fannie Mae and Freddie Mac guidelines, "

And now politicos want to have tax payers insure $625,000 mortgages!

Yes those are the dregs of the economy,
people that want to buy $781,000 dollar homes are the ones that the Gov wants to help.

We as tax payers need to insure banks of these California 1100 sq ft homes 3 bedroom 1 bath homes.


We need to let the price drop to realistic levels not have taxpayers bail banks and builders out of 700,000 homes that cost 150,000 to build.

The rent is 1,200 on these homes!!!!! HELLO?

That wasn't my number.

It was from an article I referred to to try and explain how loans are bought and sold.

of course that was our little dirty secret on wallstreet

i got everybody out at the top in 2006 thank god. i knew the scam was gonna blow up. this nation has become a country of scam artist. there all over wallstreet. make me sick to look at some of them but i work there. corporate america is the worst no over site.

I am a real estate agent,

I am a real estate agent, Ive numerous homes and been a banker and loan officer.
If the builder owned a mortgage office, if they disclosed this it was fine.
The melt down was more from cheap credit and people making poor choices. Rather than saving money they bought as much as they could possibly get approved for on 2-3 year arms. Then when the market changed and the houise value dropped drastically they couldnt afford to refinance because they were so far upside down, they had to walk away. then as more an more homes came onto the market it drove prices down even more. Currently here in MN its bank competing against bank and the regular home owner that wants to sell cant compete or they need to take a bath. If they turn and buy in this same market they can make it up on a purchase. Now interest rates are so low again, will it start the cycle all over again?? atleast the arms are pretty much gone. I wonder how much the arms programs contribute to the problem, i would guess a lot.

yep, yep, yep

this is why Ron Paul attacks the Fed not the industry.

Ron Paul 2008

Short dollar collapse video w/Peter Schiff

The inevitable collapse of the dollar

"Give a man a gun, and he could rob a bank. Give a man a bank, and he could rob the world."

Easy Fed money

The Fed created the environment. But, in a capitalist society, people pay for bad deals.

The problem with this mess is the Fed is now bailing out the bankers, and the governmnt is making Fannie Mae and Freddie Mac secure the losses.

Wall Street screams free markets when they are making money, and cries for socialism when they screw up.

If you took a mortgage you could not pay, there are plenty of apartments available now, go rent for a while and try again another time, with more knowledge.

The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.

I totally agree the problem originated with the buyer, who

knew they couldn't afford the home they were buying. However, there is plenty of blame to go around, everyone had a hand in this mess from the buyer all the way up to Bush who wanted to make everyone in America a homeowner.

Capitalism and free markets are great... greed is not. In fact, isn't greed one of the seven deadly sins, if not it should be.

Problems with the market are caused by government interference

Keep in mind, more of what caused the problem will not solve the problem.

With minor exception builders and lenders acted legally

A home purchase is a voluntary agreement.

The builder agreed to provide the home at a set price.

The Mortgage company agreed to borrow money from the Fed and lend money to the homebuyers based upon the credit standards and money supply as ultimately established by the Fed.

The mortgage company agreed to lend the homebuyer the money based upon agreed to terms to purchase the home from the builder.

The homebuyer agreed to the price from the builder and the terms of the mortgage with the mortage company. He know has an obligation to honor this agreement.

The only problem in this scenario is the Feds imposition of bad lending standards, oversupply of money and pressure to banks to make loans.

The mortgage companies and builders are not culpable. The breakdown is from the government interference in the free market.

Then why are there horror stories about stated income loans

where the borrower put down what they really made only to find out when they went to sign their papers their income was inflated way beyond anything they made or ever would make?

And the Fed does not loan money for mortgages, the mortgage companies get the funds they lend from investors.

If the information was changed.

Now that's a problem...fraud.

Also, weren't many banks making mortgage loans with money picked up at the discount window from the Fed? The lending standards set by the Fed and the leverage ratio on how much the banks could borrow from the Fed and loan against deposits also set by the Fed?

Based on some of your comments you are not well versed on

how the mortgage industry works. The Fed does not loan money for mortgages. It sets rates at which banks can borrow money. And of course, prints money as needed.

The guidelines and money for mortgage loans comes from investors, such as Fannie, Freddie, Ginnie and other investors like those who invest in Hedge Funds.

See the following article, it does a pretty good job of explaining how it all works.

Where Does the Money Come From for Mortgage Loans?
Written by Don Wixom
In the "olden" days, when someone wanted a home loan they walked downtown to the neighborhood bank or savings & loan. If the bank had extra funds laying around and considered you a good credit risk, they would lend you the money from their own funds.

It doesn't generally work like that anymore. Most of the money for home loans comes from three major institutions:

Fannie Mae (FNMA - Federal National Mortgage Association)
Freddie Mac (FHLMC - Federal Home Loan Mortgage Corporation)
Ginnie Mae (GNMA - Government National Mortgage Association)
This is how it works:

You talk to practically any lender and apply for a loan. They do all the processing and verifications and finally, you own the house and now you have a home loan and you make mortgage payments. You might be making payments to the company who originated your loan, or your loan might have been transferred to another institution. The institution where you mail your payments is called the "servicer," but most likely they do not own your loan. They are simply "servicing" your loan for the institution that does own it.

You see, what happens behind the scenes is that your loan got packaged into a "pool" with a lot of other loans and sold off to one of the three institutions listed above. The servicer of your loan gets a monthly fee from the investor for servicing your loan. This fee is usually only 3/8ths of a percent or so, but the amount adds up. There are companies that service over a billion dollars of home loans and it is a tidy income.

At the same time, whichever institution packaged your loan into the pool for Fannie Mae, Freddie Mac, or Ginnie Mae, has received additional funds with which to make more loans to other borrowers. This is the cycle that allows institutions to lend you money.

What Freddie Mac, Ginnie Mae, and Fannie may do after they purchase the pools, is break them down into smaller increments of $1000 or so, called "mortgage backed securities." They sell these mortgage backed securities to individuals or institutions on Wall Street. If you have a 401K or mutual fund, you may even own some. Perhaps you have heard of Ginnie Mae bonds? Those are securities backed by the mortgages on FHA and VA loans.

These bonds are not ownership in your loan specifically, but a piece of ownership in the entire pool of loans, of which your loan is only one among many. By selling the bonds, Ginnie Mae, Freddie Mac, and Fannie Mae obtain new funds to buy new pools so lenders can get more money to lend to new borrowers.

And that is how the cycle works.

So when you make your payment, the servicer gets to keep their tiny part, and the majority is passed on to the investor. Then the investor passes on the majority of it to the individual or institutional investor in the mortgage backed securities.

From time to time your loan may be transferred from the company where you have been making your payment to another company. They aren't selling your loan again, just the right to service your loan.

There are exceptions.

Loans above $227,150 do not conform to Fannie Mae and Freddie Mac guidelines, which is why they are called "non-conforming" loans, or "jumbo" loans. These loans are packaged into different pools and sold to different investors, not Freddie Mac or Fannie Mae. Then they are securitized and for the most part, sold as mortgage backed securities as well.

This buying and selling of mortgages and mortgage backed securities is called "mortgage banking," and it is the backbone of the mortgage business.



In the mortgage industry what has been explained in this article about how loans are packaged and sold is referred to as the "Secondary Market" not to be confused with second mortgages. The Secondary Market, sets the mortgage guidelines and rates.

Sounds like you are an expert

However, the article you cited to educate me failed to mention that each of the lenders also had virtually unlimited credit lines with the Department of Treasury. If I am not mistaken the US Treausry obtaines its money from the Fed. The lenders were not only using investor money but were also tapping into government provided credit lines to make loans.

Also, wasn't the Fed establishing the credit standards?


Where in that article does it say that the lenders get their

money from the US treasury? It referred to Fannie Mae. Fannie Mae buys mortgages.. they get the money to buy these mortgages from people and institutions who invest in mortgage backed securities.

The cycle just goes on and on The secondary market (Fannie Mae,etc.) buys mortgages, which gives the lenders money to make more loans and then Fannie Mae sells mortgage securties to investors. Then it uses that money to buy more mortgages. That's it! Well, lets say that's the simplfied version.

The Fed and the Treasury are not in the mortgage lending business.

You may be confusing conventional loans with what is referred to as government loans... FHA and VA. However, the government is only involved in these loans by insuring their payment up to a certain amount. Lenders do not get the money to make these loans from the government. They only insure payment by requiring them to have what is called MIP (mortgage insurance premium.) This premium is paid by the seller and is for the life of the loan. Or until it is refinanced into a conventional loan.

The following explains FHA loans. And it clearly states the government does not give the money for these loans.

Here is the Fannie Mae site... it explains more about their role in the mortgage business.


May I ask why you believe the lenders get their money from the Fed and the Treasury?

The mortgage business is quite complicated and I am by no means an expert.


When I called my senator's office, Norm "best friends with bush" Colemen, his staff told me that there was a seperation between realtors, appraisers and mortgage brokers; thus, "fraud" wasn't part of the housing bubble-- only subprime problems were and the "stimulus bill" was, thus, only buying mortgages from struggling folks!

However, I read somewhere that if the government acknowledges any fraud, they can't legally buy those bad mortgages! so they won't acknowledge fraud until after the mortgages are bought.


anyway, unless the inflated housing prices fall, the government wins because of all the extra property tax they're collecting!

Not as Much Seperation as They Think.

I'm an appraiser here in Florida and I can gaurantee you there isn't the seperation that Sen. Coleman's staff believes there is. That's yet another example of how far removed from the real world Congress is. During the whole housing boom, the pressure from mortgage brokers to "hit" a number or overlook major damage was immeasurable. I couldn't begin to tell you how many clients I lost because I refused to do it. I even had one who god mad because I reccommended a roof inspection on a home with practically no roof after one of the hurricanes in '04. The worst part about it was that Johnny Broker called the next appraiser in the phonebook and he'd do it. The problem stems from no oversight of the loan officers or brokers whatsoever. If a LO was fired for doing something shady, they'd just go next door and do it all over again for a new company. Now I'm not saying the federal gov't should be responsible for that oversight, but someone should, maybe the states.

Another cause of this that no one is talking about is that many large lenders have appraisers on staff that they give work to. I'm not sure how this is legal after the S&L Scandal, but it's going on. It's impossible for an appraiser on a lender's payroll to give an unbiased opinion of value. If they don't "hit the number" they catch hell from their boss and if they come in at an honest value that's below what's necessary to do the loan, they catch hell from their boss.

The real losers in all of this are the homeowners who were scammed into these loans by corrupt, greedy lenders. At first I thought it was the homeowners fault, but after being out there talking to owners, the stories I hear about the lying and deceiving that went on is ridiculous. They went to the lenders for help and were taken advantage of. It's a real shame.

I could go on and on about this, but I'll stop here.

That's true there is suppose to be an arms length

separation between realtors, appraisers and mortgage brokers, each owned and operated by different individuals. But what about home builders who own and operate their own mortgage and title companies... how can that be separated?

It's like putting the fox in charge of the hen house.

There is just too much temptation and too much at stake for the home builder not to do whatever it takes to make sure a loan is approved, whether the person qualifies or not.

That's one of the main reasons for this mortgage mess.

The government is invovled in many aspects of the mortgage industry, from Reg Z to audits. But when it comes to conflict of interest they turn a blind eye.


Or putting Fox in charge of the news

Why do they allow the oil companies to own the gas stations?

Same question, just different area.

Note now here in CA new home building is stopped, with only the current ones being finished and no new ones on the way. This is good for the housing market as it causes a cap on home supply (making prices recover) but bad for builders not having any work.

Me, I'm remodelling, so I can and have used some of those builders in that, and I've been getting cheaper rates because they need the work and I need the work done.

The real b*tch is that those of us in 30-fixeds are seeing our equity go to crap because the subprime mess caused the entire market to tank, taking us with it.

Naturally, we get no relief for being smart.

BTW, I'm donating my "stimulus package" rebate to the Paul campaign since it won't max me out. Rebate Bomb, anyone?

"Welcome to 2008: The Year of Ron Paul!"

The inflated home prices were due mainly to easy credit,

which created a whole new short lived industry known as flipping. By the time a new home closed it was worth more than the original purchase price.

This is where the flipper came in, they would buy new homes, many times not just one home, but two, three or more and by the time it was built they would turn around and sell it... sometimes for tens of thousands in profit.

Some builders tried to put a stop to the flipping by putting a clause in their contract stating that if the home was sold in less than a year there would be a penalty, in some cases that penalty could be $20,000+. However, it didn't stop the flipping, because the flipper was making well over the penalty.

This is why the house prices shot up so fast. It was like a pyramid scheme. The last buyer is the one who is stuck.

And of course, it goes without saying that the resale home market also went up in price as well.

This created the mess our country finds itself in today. Because the people who bought the homes to live in now find themselves between a rock and a hard place. Their payments are going up and their home value is going down so much that they owe more than their home is worth, thus making it impossible for them to take advantage of the lower rates the Fed is handing out yet again.

The lower rates the Fed is handing out is no good for the average American who is about to lose their home, not unless the lenders are willing to loan 150%+ loan to value of a home or to refinance without doing an appraisal.

Something I doubt the lenders will do, especially in a market of falling home values.