Your Mortgage
Like many folks, 27 years ago I was doing well, married with one child and we thought it was time for a home. We went looking and found a small 3 bedroom home we liked and set about acquiring it. Back in 1985, things were fairly stable and we were able to come up with a 10% down payment. That was least amount lenders would accept then, and we had to pay mortgage insurance because we didn't have the full 20%. At that time, I never considered all the players involved, we just wanted the house.
With a decent job, decent credit and not too much debt, we were ALLOWED to buy the home. Of course, we were happy about that and set up housekeeping. In normal times, that should have been it. However about five years later, we started getting notices to re-finance our house at much lower interest rates. At that time, business had slacked off and we were kinda struggling, so I looked into it.
Hey, no closing costs, no fees, just come on in and sign some papers, then leave owing a hundred or so dollars less per month. The new loan was for exactly what was left on the mortgage. Seemed like a decent thing to do and I didn't need any cash. Sure, I knew someone was going to make a few bucks, but so what. My monthly payments were lower and still had a 30 year mortgage. Yes, it was starting over, but since so much of the payment goes for interest, there wasn't much equity anyway.
About a year later, I get a letter from another firm saying to make payments to them now. Checked into it, and yes indeed, they had sold my loan. Well, so what? Same amount due and same number of payments left to pay. No big deal. However, this same process seemed to happen every few years since. I begin to realize that I was being bought and sold whenever it was in some company's interest to do so.
Enter The Bankers
Now I realize that financial companies were flipping mortgages, the same way some people flipped houses before it became unprofitable to do so. Well, now it's become unprofitable for companies to flip mortgages. And since I took out my original mortgage, requirements have been reduced dramatically. It didn't matter as long as someone could sell your promises to someone else, and that your home was perceived as increasing in value.Soon, your promises [mortgage] were being cut up into slivers [tranches] and different pieces of it was being combined with different pieces of other peoples' paper, then sold as a unit to whom ever would buy it. That turned out to be investment bankers, who sold to pension funds, hedge funds and foreign financial companies. You know how hard it would be to try to get 2nd, 3rd and 4th mortgages on your home. But the financial wizards were able to get 8th, 9th even 10th mortgages on your home. Of course, they didn't call it that. They called it "leverage."
Creating Money
But where did financial wizards [hedge funds and investment pools] get that money? Same way the homeowner did, they BORROWED it from whatever financial institution would loan it to them, based on promises [mortgages] of the homeowners. The gunslingers [loan originators] at the banks received their bonuses based on how much they could get these funds and pools to borrow from them. The banks received their cut, the salesmen received their cut, and as long as these "securities" could be bought and sold, the hedge funds and investment pools made money. For example:What is clear is that home loans were highly lucrative to Wall Street and its bankers. The average total compensation for managing directors in the mortgage divisions of investment banks was $2.52 million in 2006, compared with $1.75 million for managing directors in other areas, according to Johnson Associates, a compensation consulting firm. This year, mortgage officials will probably earn $1.01 million, while other managing directors are expected to earn $1.75 million. [12/06/07-New York Times]Value of Money
But wait a minute you say, banks don't have THAT much money on hand. You're absolutely right, so they CREATE it. Whoa, nelly. Banks do not have the right to print money, you say. You're absolutely right again. They don't print it; they make bookkeeping entries! This is the magic of our "fractional reserve" banking system. Through repeated loans, a bank can each $100 of deposits and turn it into $1000 over time. That's 10 times! Wow!Now obviously a bank is limited in the amount of money on deposit. Therefore, if they want to make more money loaning money, they go to their bank, which is the Federal Reserve Bank. Now obviously the Federal Reserve bank has a limited amount of money on hand, so who do they go to? They don't! They simply created it. Yeah, you read correctly. They create it. Okay, how?
This is a quote, from Marriner Eccles, Chairman of the Federal Reserve, way back in 1935.
"When the banks buy a billion dollars of Government bonds as they are offered . . . the banks credit the deposit account of the Treasury with a billion dollars. The debit their Government bond account a billion dollars; or they actually create, buy a bookkeeping entry, a billion dollars." Quoted from Page 165, Web of Debt, Ellen Hodgson Brown.So now, there's another billion dollars in circulation. If that amount was created and not traded for labor or products, then the total money supply was increased, and its value decreased. That's inflation. That's why the value of an ounce of gold seems to go up, but it's really that the value of the dollar has decreased, and the owner of the gold wants a little more green for it. Your house hasn't changed, but it's price has gone up, because the value of the dollar has gone down. You have promised to repay your mortgage in a certain amount of money per month. If the value of the dollar falls, the value of your mortgage payment falls, too. This might seem good news, and certain people play it that way. However, it also means that the value of your savings, pensions and anything else owed back to you at a later time will be worth less. Worth less, or worthless, depending on the time frame.A Fatal Flaw
Historically, most people have proven that they keep their promises. It's hard to live otherwise. So based on that single fact, every person who packaged and resold your mortgage, and pieces of your mortgage, counted on the lowly homeowner to keep his promise. Then everyone else could keep their promises. However, there was one flaw in all this. Like all divisions of labor, there are various divisions of these financial companies that have no idea what goes on elsewhere in their company. So the division that finances manufacturing, being unconcerned with financing home mortgages, thought it would be a smart idea to relocate manufacturing facilities off-shore. India, China, whatever. Then other large businesses, such as health industries and the computer industries,followed.The manufacturing top brass took home more and more money. Millions more. The financial top brass took away more and more money. Millions more. But the poor guy at the bottom, who promised to pay the mortgage, now has no way to keep his promise. You might say the top brass shot themselves in the leg, with no means to stand up anymore. This financial house of cards is now collapsing.
Finding Real Owners
So, the poor homeowner at the bottom of this house of cards has defaulted. Bankrupt or not, there's no more money to make monthly payments because there's no jobs that pay enough anymore. Or so it seems. But what about the banks that loaned all the money in the first place? They've got the mortgage, right? Not any more. Remember a few paragraphs back when I said that your mortgage was cut up in slivers, packaged with other slivers, then sold. It's now going to be extremely difficult for the creditor holding a note due to unravel the mess to take over the home."A Federal Court Judge rejected 14 foreclosure claims by Deutsche Bank, which was trying to collect on securitized sub-prime mortgage loans it acquired.The judge stated that the Bank did not really own the “bad loans” because it acquired them after defaults had already occurred. He asked the bank to prove it held the mortgage at the time of the foreclosure notices or said he will dismiss its claims. [11/20/07 Canada.com]
What Now?
What a mess for everyone involved. Which is exactly why today the President and Treasury Secretary announced an interest rate freeze, which some call "teaser freezer." It should help stabilize the house of cards and let some homeowners stay in their homes by preventing the upward adjustment of the "teaser rate" to today's actual rate.Hundreds of thousands of strapped homeowners could get some relief from a plan negotiated by the Bush administration to freeze interest rates on subprime mortgages that are scheduled to rise in the coming months.With all that has been written above, now you know why this "solution" is so important. If the homeowner is able to keep paying the mortgage, the "house of cards" might fall slow enough for the investment banks to unload all those paper promises. In fact, some are already bragging about it."There is no perfect solution," President Bush said Thursday as he announced an agreement hammered out with the mortgage industry. "The homeowners deserve our help. [12/06/07 AP]
One big bank that saw the trouble coming, Goldman Sachs, began reducing its inventory of mortgages and mortgage securities late last year.Let's all hope that the economy improves over the next few years. But don't bet the farm on it.[But now the blame game begins.]
The New York attorney general, Andrew M. Cuomo, has subpoenaed major Wall Street banks, including Deutsche Bank, Merrill Lynch and Morgan Stanley, seeking information about the packaging and selling of subprime mortgages. [12/06/07 New York Times]
© 2007 by Edward Ulysses Cate
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