Friday, December 12, 2008

Chinese Checker Mortgage Scam

One of the reasons I did not get in on the recent national ponzi scheme real estate scam and buy a house around 1999 in Staten Island was the fact that the people on the other side of the desk were selling what I thought was a bizarre witches brew of credit to qualify for a mortgage loan.

I qualified for a certain amount but the average price of houses was just a little bit higher. This might get complicated. I’ll start at the beginning.

When I went out to Arizona many years ago for personal reasons, I ended up as a loan processor in a mortgage company and in the tail end of the Keating Five style across the board Savings and Loan scam. The mortgage company I worked for was double documenting all its government loans, FHA, VA, because of the formerly unsavory practices of commission only sales/loan originators.

The government backed loans were the most regulated and the most affordable to the average person. Outside of the FHA, VA loans were the commercial or conventional mortgages that were not so heavily regulated. You did not need inspections. You could buy a house "as is" with a conventional mortgage loan. And these were serviced/packaged through the Freddie and Fannie fandangle government bureaucracy.

The conventional mortgage loans were thought to be a better risk because they wanted a minimum of 10% down and up to 20% in order to avoid mortgage insurance on top of the loan. Traditionally most lender’s believed that if they had twenty percent down on a property they could break even – even if the borrower defaulted and went into foreclosure. Funny how nineteenth and early twentieth century business concepts get recycled and never questioned even by the new young Turks of financial fantasy land.

The Mortgage Insurance was a guarantee to the lender that the lender would recover the full cost of the mortgage should the borrower default and go into foreclosure. All in all, conventional mortgage paper was thought to be easier and cleaner in terms of paperwork and servicing of the investment by the lender.

I cannot explain the Freddie and Fannie fandangle bureaucracies except to say that any note can be packaged together in say a ten million dollar security and sold as a paper investment anywhere on the planet.

The bridge between the person who owed on the mortgage and the investor who held the security paper was the servicing company who receives the mortgage payment. The servicer deducts a small fee and passes the balance onto the investor holding onto the paper.

At one time servicers were local and part of the local bank that originated the mortgage loan. At one time the bank held the note in the vault as its own claim to the property with return on investment with each mortgage payment made.

Somewhere along the time line, local got replaced with global. The local bank building is now a factory outlet and the servicer of the mortgage floats around to different corporations from year to year not unlike temporary assignments of HMO doctors to patients. It is all very efficient, shaving pennies and milli-pennies on billions and trillions of dollars. The CEO with Ivy League MBAs no doubt earn their figure salaries and bonuses thinking up ways to squeeze blood from stone.

Back to 1999, what kept me from this new Chinese Checker like rules mortgage game was that I could borrow 10% down on a credit card for a conventional loan and use the cash as down payment on a mortgage. In theory it is 0% down but hey you have got to pay on the credit card besides the mortgage. Perhaps it was against some fake frat house SEC type rule or law to tell me to refinance after I close on the property and pay off the credit card. But I could barely afford the projected mortgage payment and the thought of some four or five hundred dollars a month minimum payment on a new credit card just blew my mind.

ARM loans, adjustable rate mortgages that kick up in interest in one or two years made a lot of people think that the original monthly payment would stay that way for years. Of course others were just speculating and using the ARMs to help pump up the appraised value of property – buy low – sell to suckers.

I did not have the guts to jump into the new brave new ponzi world of mortgage financing.

So, I had to be stoic and watch the real estate values literally go up five to ten percent per quarter and year after year. In retrospect I instinctively knew that this was all a crock of horses*** but I don’t have a MBA in business and I did not work for the Federal Reserve Bank that was supposed to monitor “inflation”.

There was no inflation in housing in the United States for ten years - was there? – just basic out and out old fashioned fraud on all levels from the borrower all the way up to the CEOs buying toxic mortgage backed loans and trying to dump them overseas for a profit.

Congress and government agencies were asleep at the switch and in the case of Freddie and Fannie – they were both pimps and enablers of the destruction of centuries old prudence and classic business logic and ethics.

The housing collapse is an example where big government is the cause of disaster and not the fixer of such.

How does this mess get cleaned up? Slowly and painfully and the government printing presses cannot print the tens of trillions of dollars needed to put Humpty Dumpty Wall Street and Main Street back together again. Only time and perhaps growth in a new green economy may help clean up this entangled ten million house vehicular collision caused by the former masters of the universe.

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