how did this housing mess start? (loans, loan, legal advice, sales)

[sheenie2000]

Thanks for the answers.
And thank you rcarillo and evilnewbie for the detailed responses. It makes more sense now. I was trying to understand the flow of the process of how the actual money goes between the sources.

So who are these investors that invested millions in mortgages? And when a loan gets 'packaged' into a MBS. What does packaged actually mean? Is it just some documents and paperwork?

[scgraham]

Originally Posted by sheenie2000

Thanks for the answers.
And thank you rcarillo and evilnewbie for the detailed responses. It makes more sense now. I was trying to understand the flow of the process of how the actual money goes between the sources.

So who are these investors that invested millions in mortgages? And when a loan gets 'packaged' into a MBS. What does packaged actually mean? Is it just some documents and paperwork?

Check out your 401K because you just might be an investor.

[rcarrillo]

Originally Posted by sheenie2000

Thanks for the answers.
And thank you rcarillo and evilnewbie for the detailed responses. It makes more sense now. I was trying to understand the flow of the process of how the actual money goes between the sources.

So who are these investors that invested millions in mortgages? And when a loan gets 'packaged' into a MBS. What does packaged actually mean? Is it just some documents and paperwork?

Packaged just means they took a bunch of individual mortgages, added them up in a group and sold them as a whole. It is too expensive and difficult to sell mortgages 1 at a time to large investors, so they get packaged into the large MBS. The owner of that MBS has the right to collect the interest on the mortgage notes once they buy them.

An assumption is made that they are all the same "risk level", such as prime, A-, BC (sub-prime) and the investor buys the risk/reward profile they want. One problem that was found is that not all "prime" loans are prime, not all A- loans are equal, etc. Also... very few loans were quality checked in the package, so a lot of junk was mixed in with some okay ones. More than one would have expected.

401ks, companies, pension plans, government agencies, foreign investors... they all bought these MBS as "secure" investments because they were "backed" by the values of the home.

[HappyTexan]

Some of them were also rated as AAA Insured when the underlying loan was in fact subprime or alt-A. That's how AMBAC and MBIA got into trouble.

[linicx]

The bankers had mortgagors had help from rogue realtors who would seel their mother for a buck. An "Honest Reatlor" is an oxymoron.

[RonAriba]

No down payment home ownership, Easy credit, Freddie Mac, Fannie Mae, HUD, Appraisers, and Lenders.

How about requiring:

Verifiable income stream
Better ethical and competent appraisers
Regulate Mortgage Brokers and how they order appraisals
10-20% down payment.

[brokerdave]

its funny how things turned out, as if none of us saw this coming, lol. countrywide with the 95% stated income with 1.25% interest neg amm loans.

ive been a mortgage broker for years, one thing is for sure, people lie about everything. thats why we have credit scores. allowing people to make up there own income so that they can afford it for a fraction of the price for a short period and flip it and even allow the mortgage to increase to 125% of the value is rediculous. i personally never submitted 1 neg amm loan. i simply couldnt do that. i have a responsiblity to my clients as well as the state and federal laws.

i blame countrywide, after them, every bank got really aggresive to compete with them. not to say things werent already out of hand, but they were def. the tip of the iceberg, imo.

[GeorgiaGirl2]

Originally Posted by jamesandveybe

The responsibility sits squarely on the shoulders of the borrowers who signed up to pay more than they could afford. Greed.

Moreover, it was the Adjustable Rate Mortgage combined with low interest rates in effect at the inception of these loans. This enabled borrowers to qualify for larger loan amounts and buy more house for their money then they would normally be able to afford with a standard fixed rate mortgage. Although most of these borrowers were informed that their rate would change and exactly how the new rate would be determined, the realization did not hit until the interest rates on these loans began to change. Then these borrower got a good case of "sticker shock" when the new loan payment coupons arrived in the mail. The increase in the loan payment, along with the escalating homeowner's insurance premiums and increases in real estate taxes, (both of which are usually included in the loan payment), blew the monthly budgets of these homeowners. Many of these homeowners had to choose between buying food for their families and gasoline to go to work, (which has also escalated), and making their house payments. Many had to abandon their homes and move close to their jobs. With so many homes now on the market the values of these homes plummeted.

[rcarrillo]

Originally Posted by GeorgiaGirl2

Moreover, it was the Adjustable Rate Mortgage combined with low interest rates in effect at the inception of these loans. This enabled borrowers to qualify for larger loan amounts and buy more house for their money then they would normally be able to afford with a standard fixed rate mortgage. Although most of these borrowers were informed that their rate would change and exactly how the new rate would be determined, the realization did not hit until the interest rates on these loans began to change. Then these borrower got a good case of "sticker shock" when the new loan payment coupons arrived in the mail. The increase in the loan payment, along with the escalating homeowner's insurance premiums and increases in real estate taxes, (both of which are usually included in the loan payment), blew the monthly budgets of these homeowners.

True, but some borrowers were lied to about the terms of their loans or the adjustments that would happen. It is the borrowers responsibility to read what they sign and buy only they can afford, but loan officers should have been more educated about the services they provided and disclosed the risks. Everyone got greedy and just looked the other way to risk.... hoping that the market would only go up.

[FarNorthDallas]

I don't think anyone really cared about the credit-worthiness of the borrower. The home's appreciation would cover any problems. If they borrower needed more money, they could take the growing equity out. If the borrower defaulted, the bank could foreclosure and then re-sell for much higher since the home was appreciating. Wall Street, the investors buying the re-packaged mortgages, lenders, brokers, apprasiers just needed someone to sign the buyer's papers at closing and they made money and with appreciation would continue to make money no matter what happened to the borrowers.