Financial Crisis Report-The Illusion and the Truth

   Posted by: chris   in Fish Talk

who caused the financial crisisSo they have just released 3, I repeat 3 versions of the financial  crisis report, one democratic report and two republican reports. Most probably the republicans and the tee shirt party couldn’t agree on who shot the moose that laid the golden egg.

Anyway not being shy with comment or opinion and having the good fortune to have been involved in the real estate industry while the river of cash was flowing here is my two cents worth.

In the golden years of the early 2000’s the reality of home loans was that virtually any number that had 9 digits could get a mortgage.

I don’t know that a heartbeat was necessary but any social security or ein number worked. An ein number is a number which closely resembles a social security number and is released by the IRS to an entity or person for business tax purposes.

So we has a scenario where:

  • Mortgage regulation in essence disappeared.
  • The banks who where lending packaged and sold the mortgages immediately so they where never exposed to loss or default.
  • Any appraisal was accepted once it could be comped (backed up by 3 recent sales within a mile)
  • The packaged mortgages where basically appraised by the bond ratings agencies on wall street to look like aaa rated investment vehicles.
  • There where lines of waiting  investors for the packaged mortgages which because of their bond ratings looked like easy money.

What happened was that a perfect storm of easy mortgage money met with eager buyers, Realtors and mortgage brokers who work on commission and only get paid when the deal closes, and appraisers who found a way to justify the home prices that the mortgage brokers suggested.

Then there is mortgage electronic which is a mortgage depositary created by that large financial institutions to allow them to warehouse mortgage while selling the note portion of the home loan.

A home loan has two parts

(a) a note which is the piece of paper that states the money owed and the interest rate and other financial conditions.

(b) a mortgage which is a security instrument which lays out the remedies to the note holder should a default occur.

This nice split in the financial document that is a home loan allows the financial institutions to package the notes into a mortgage backed security and sell it to investors via wall street brokerages while warehousing the mortgage documents in mortgage electronic and assigning servicing rights to one of their members so they can collect servicing fees without exposure to the actual loan that they are servicing.

Even in the event of a foreclosure the servicing lender merely collects fees for foreclosing and faces no loss.

What this allows is for the mortgage banks to write home loans earn fees and totally avoid any liability for the loans which they are making. This was the prefect recipe for the creation of extremely lax underwriting.

So the first thing that caused the financial crisis was lax underwriting in the fee feeding frenzy coupled with appraisers who wrote appraisals that sometimes resembled the very best that Hans Christian Anderson could produce.

The second thing that created or allowed the financial crisis to occur was bond ratings. In all honesty who would have bought these mortgage backed securities if they knew how the mortgages had been created.

The mortgages in most of these investment vehicles where the liar loan variety and contrary to popular opinion it wasn’t only the mortgage applicant that was the liar.

These where no doc loans, so the income and cash on hand of the mortgage applicant was stated as enough to pass underwriting. It could just as easily be 4 million as 40 K who cared there where no question asked other than how much do you make and how much do you have in the bank. There was no verification required.

Then the value of the home was appraised as the amount that the home seller could get the home buyer to offer. So with such easy money home prices went up and up and appraisals went north to match purchase and sales agreements.

Then when these time bombs went to wall street the Bond Rating Agencies basically appraised them as aaa or great or however they rate bonds.

The only safeguards built into the mortgage banking and mortgage backed security industry during the period that led up to the financial crisis where the appraisers and the bond rating agencies. Both sold out for money under duress from the people who where giving them business.

It is true that investors eager for easy income lent the money and homeowners awestruck with rising home values  took it leaving a huge mess for the taxpayers to clean up but who is really to blame.

Well in a system designed to facilitate and protect capital no one is to blame. This whole rumpus is really only rhetoric to put the American public back into their comfy slumber and allow the show to go on.

Boom and bust is a natural cycle in a monetary system based on nothing, remember that every dollar bill in your pocket is just that a bill, American currency is in fact debt, the gold and silver standard have long gone and we are now using fiat currency or faith currency.

A dollar is a good as you believe it to be.

However this boom and bust event was worsened by the reluctance of Norman Greenspan failing to raise interests and stem inflation in an attempt to make the Bush administration look like something that it wasn’t.

So in the end there is/was no financial crisis it was just business as usual in the fountain of democracy where government of the people by rich people for rich people continues to prosper.

Just because you are poor or middle class one paycheck from the gutter rich and think that there was a meltdown, don’t kid yourself. No self respecting billionaire has lost a wink of sleep over this supposed financial crisis, on the contrary they just got a little richer!

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This entry was posted on Friday, January 28th, 2011 at 1:03 pm and is filed under Fish Talk. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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