Why they wrote the bad mortgages in the first place

[Phoebe Loosinhouse]

Here is my new take on things which really is mind-blowing as K-Pete says, because up until this point I thought this was just rampant greed run amok due to lack of oversight and regulation, but now, I am seeing that this could actually be a well-thought out construct.

The reason for the bad mortgages is that there was a market for the bad mortgages. All former underwriting guidelines about credit rate, income, down payment, job history, get completely tossed to the winds. Jokes are even made that NINJA (No income, no job, no assets) are perfectly acceptable. All you literally need to get a loan is a name and a social security number. No mortgage broker or loan officer previously would have even considered pushing through these loans before because they would have been laughed out of underwriting and the industry. So what changed?

1. Someone told all the loan people to go ahead and write any loan anyway because they had investors who would buy them. The mortgage brokers probably said, "huh? well, sure, ok - if you want them, I'll write them" and they did and they earned zillions of dollars in fees and commissions on mortgages that previously did not exist, because buyers for these loans did not exist previously.

2. The someone or something who told the brokers to go ahead and write the bad loans didn't care, because they were going to bundle all the loans, good and bad into mortgage securities which they were going to sell and make a zillions of dollars in fees and commissions on mortgages that previously did not exist, because before buyers for the securities did not exist, but now they do.

3. The buyers for the securities don't care particularly about the underlying quality, and they probably even know how bad they are at this point, but they don't care, because they are actually going to bet AGAINST the securities by buying credit default swaps and THAT is how they are going to make the big bucks.

So that my friends, is why they needed BAD mortgages in the first place, so that they could bet against them later.

Imagine if the tulip mania people had the foresight in the olden days to run up the price of the tulips but to also be able to bet that the prices of the tulips will drop and that they would make EVEN more money on the downside.

It is unf!@#ing believable.

[Skidmore]

1. And think of the land grabs that could take place too.

[rucky]

2. Or the investors got duped by Moody's

and other "independent" rating agencies.

http://www.portfolio.com/news-markets/national-news/portfolio/2007/08/13/Moody-Ratings-Fiasco

"... It’s becoming clear that the ratings agencies were far from passive raters, particularly when it came to housing bonds. With these, the agencies were integral to the process, and that could give regulators and critics the ammunition they’ve been looking for to finally force the Big Three to change. The credit-ratings agencies “made the market. Nobody would have been able to sell these bonds without the ratings,” says Ohio attorney general Marc Dann, who is investigating the agencies for possibly aiding and abetting mortgage fraud. “That relationship was never disclosed to anybody.”

The ratings that were ultimately assigned proved too generous, considering the state of the market. To make matters worse, the agencies were much too slow in downgrading the housing bonds, overlooking signs of excess that almost everyone else recognized. In July, in a last-ditch effort to make amends, Moody’s and S&P downgraded hundreds of mortgage bonds—the equivalent of slapping food-safety warnings on meat that’s already rotting in the aisles."

[Phoebe Loosinhouse]

3. But why did the original mortage brokers/ loan officers throw out all normal underwriting standards?

Because someone told them they could.

[rucky]

9. The banks, HUD, and Freddie & Fannie set the underwriting guidelines.

Just enough to satisfy the investors and ratings agencies. Apparently, the ability for the borrower to pay had little to do with it.

Moody's certainly didn't act alone in creating a counterfeit windfall. This came from the top, and tapped into the greed of everybody down the chain: The investors and rating agencies said what they'll buy and how much it's worth. The banks and their underwriters obliged. The originators hit the streets and promised borrowers the moon and the stars. The borrowers borrowed.

But i still don't think the downfall part was engineered - those short-sighted greedy bastards saw a way to make a chunk of money and didn't care about anything else at the time. It was fraudulent and risky and I can't believe we're bailing them out.

Funny how Marc Dann, mentioned in the article above as the Ohio AG investigating, gets hit with a scandal a few months later and is forced to resign.

[dixiegrrrrl]

12. Whoa there...another investigator taken out?

I did not know of this.
Any links would be appreciated.
I am wondering how many other AG types this happened to.

[rucky]

13. ...

He was competent in his job...

http://money.cnn.com/2007/07/05/news/economy/subprime.fortune/index.htm

But he couldn't keep it in his pants...

http://www.bizjournals.com/cincinnati/stories/2008/05/12/daily33.html

pretty sad. I don't know if the new AG is picking this up. The story kinda disappeared.

[Phoebe Loosinhouse]

14. And of course Spitzer.

I think I read that he was looking into AIG.

[magellan]

4. I think you've hit on something here

We're not seeing disorganized pockets of greed. It's showing up everywhere within the lending/banking industry. The only thing that could explain this is they all found a common way to make money off the bad loans and took advantage.

And now they expect to be rewarded for losing their shirts! If I didn't think Congress has every intention of doing just that, I'd laugh....

[Phoebe Loosinhouse]

10. I can't take credit - it's just the chrystallization of my thoughts due to kpetes OP

here:
http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4068418&mesg_id=4068418

which elaborated on a Daily Kos diary contained in that thread.

And it is Ben Stein's almost off-the-cuff yet mind blowing comment about the credit default swaps also contained therein:

"The profit can be wildly out of proportion to the real amount of defaults, because speculators can push down the price of instruments tied to the subprime mortgages far beyond what the real rates of loss have been. As I said, the profits here can be beyond imagining. (In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse...)"

So, yes, one MIGHT wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on it's collapse. I mean, that is Ben Stein musing aloud about a MIHOP in the subprime collapse.

One thing about the really smart people in finance - sometimes they're TOO smart, or as some put it - "too clever by half" and sometimes they are just barely inside the realm of legality. We've seen it before with the S&L and the junk bond scandals and Enron with the electric grid.

I'm not sure how concerted the effort was, but it's not hard for me to believe that a lot of the really "clever" guys with the propensity to "game" systems, might not have seen the same truck-sized loophole at the same time and went for itsimultaneously.
I don't think their goal was to bring down the whole system, since that is killing the golden goose, but I think that is what they did inadvertently.

[magellan]

11. Their goal most certainly wasn't to bring down the whole system

They just operated as if the money pit was bottomless. Greed blinded them. And that's why I think the firms involved should be allowed to fail. It's their job to understand this stuff. I have *no* mind for finances/markets, yet even I could see the logic behind the dire warnings certain DUers were raising two years ago about overextending credit.

Even Ben Stein gets it, perhaps without realizing, proving it doesn't take a rocket scientist!

I give you credit for pulling together the pieces. I'll be surprised if you haven't nailed it on the head.

Much to all our sorrow.

[Marsala]

5. They weren't just packaging bad mortgages to bet against them

That would be like basing an entire stock market on short selling. It wouldn't work. Most of the credit default swaps were meant to insure AGAINST failure, to reduce risk. Of course, since they were ridiculously overused, they wound up amplifying risk. There was some betting against securities, but mainly they actually expected bad mortgages to succeed in the long run due to the belief that housing prices always rise.

[Hannah Bell]

7. but they don't always rise. especially when fraud's involved.

check "florida land boom," ca. 1920's.

& if i know it, the smart guys know it too.

*somebody* was setting up the fraud to bet against it, for sure.

[Phoebe Loosinhouse]

8. Do you really think that intelligent people believe that "housing prices always rise"

There have been bubbles before. Do you think the smartest financial people supposedly in the world thought that prices just just go up, up ,up even when wages weren't following?

You can sit in your own neighborhood and watch your own house go from 180,000 to 400,000 from 20002-2005 and KNOW that the brakes were coming soon. Is everyone in America supposed to have their formerly modest, average house become worth 500K, 600K, a million dollars? Where is the pool of buyers? Unsustainable house appreciation is based on flipping and "the greater fool" principle. The music always comes to a stop sometime.

[Hannah Bell]

6. brilliantly evil.

[SoCalDem]

15. Greenspan needed that one remaining leg of the stool to pretend that

there was no problem with the economy.. "Housing" and the people it employed all down the line, was the ONLY thing keeping the plates spinning.. he knew it, and as soon as he saw the handwriting on the wall, he bailed..

Interest rates were kept ridiculaously low, to compensate for the fact that houses were inflating at an even "ridiculouser" rate..It's no surprise that eventually the whole thing would collapse..

I'm nobody, and I "knew" it 3-4 years ago..

[aikoaiko]

16. This is the best explanation I've seen -- with heavy use of stick figures

http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true

[Phoebe Loosinhouse]

17. My God - that is absolutely fantastic! Thank you! Worth bookmarking.

It horrible enough with that depiction. But, I'm thinking it may be even more horrible since it leaves out the slides about the credit swaps where people on the sidelines are making outside bets on whether the crappy mortgages will fail, tying up even more money in what was doomed to fail from the beginning.

[Phoebe Loosinhouse]

18. Now I'll go out on a limb again and predict what the smoking gun will look like

All the feds have to look for to prove fraud is to find some company who purchased the CDO's (collateralized debt obligation) and then purchased a credit swap betting AGAINST that same security - in other words, attempting to short sell themselves - and where the GREATER gain is made on the downside bet.

(Side note here - that would also explain why almost no one has been able to successfully work with the loan servicers to work out their loans. There may be no interest in working out the loans - that could be the message the servicers are getting from the noteholders)

I also predict that the downside bet will exist in some Special Purpose Vehicle or privately held subsidiary. That's what the Enron boys favored and that's how the smart guys like to bury things. Actually, both the CDO AND the credit swap might be held in SPVs - better to hide ALL the evidence.

This is all purely speculation jumping off of Ben Stein's comment that it's as if they WANTED the subprimes to collapse.

[Lydia Leftcoast]

19. The Republican talking point on this matter is crypto-racism

They claim that the Democrats, by banning redlining, FORCED the financial institutions to lend to non-creditworthy people of color. (Actually, redlining is the practice of categorically banning all loans in a given neighborhood simply because most of its residents are people of color.)

Let the infallible god Rush Limbaugh tell that to someone who's already a hardcore racist, and you'll never unconvince them.

[Phoebe Loosinhouse]

20. Just more of the fog machine.

The only thing banning redlining did was say you had to offer the same mortgages at the same standards you were offering elsewhere. Before it was banned, loans were offered at higher rates strictly because of where the homeowner lived or was buying. It did NOTHING to lower underwriting standards. If Rush LImbaugh or anyone says that, it just proves they are ignorant as well as being racist.

[Phoebe Loosinhouse]

21. a kick for the evening crowd.