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Old 08-05-2008, 04:01 PM
 
Location: Charlotte, NC
2,193 posts, read 4,448,163 times
Reputation: 1072

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Ok I'm missing a piece of the puzzle as to how this mess started. I hope you guys can help me out in figuring it out.

A bank lends money to a borrower (homeowner) for say 100K. Where does that 100K come from and who does it go to? What's the flow of the money. Where does the 100K for the loan actually originate from?

I hear about mortgage backed securities and wall street investors, but how do they end up in the mix?
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Old 08-05-2008, 07:20 PM
 
Location: Cary, NC
1,036 posts, read 3,627,489 times
Reputation: 503
In the olden days, the money came from deposits at a bank. So a bank takes a customers money in checking, savings, money market and CD accounts. They might give the account holder some small 1-2% interest on it. Then they turn around and loan money on mortgages, auto loans, credit cards, installment loans, etc. The difference between the two is their revenue, out of which they paid expenses and losses on bad loans... the amount left over was the profit. On many portfolio loan products (or with credit unions), this is still the case.

Then there are loans that lenders sell on the secondary market to wall street. Subprime and A- loans were packaged by investment firms into MBS (mortgage backed securities) and sold to investors. They didn't sell just 1 loan, they pooled 100s of loans into these big packages that were supposed to be about the same risk level... one mistake is that often there was a mix of junk loans and average loans in a pool. So the lender never really had the money in their possesion. They borrowed from other banks (like CountryWide) or the investment banks fromw what was called a warehouse line, closed the loans and immediately sold them to the investment banks to pool and sell to investors around the world.

Another problem was as you can see there was less liability or interest in standards because the loans were made and sold quickly. The lender didn't have to worry about the performance over 10-20 years or the cost of servicing the loan, they made their profit quick and moved on to the next sale. It helped lower overheads and increase efficiency so there were benefits... but it added a lot of risk and led to a competition based on price and speed, not on service, value, or long term-sustainability.

Many people jumped into the business as "sales people". They didn't need to learn the financial benefits or risks of a product, just how to sell it. There was no need to be a professional when it became a race to the lowest price and all buyers would ask was "how much can I buy" and "what rate do you have"? The greed went from Wall Street making a profit on the sale of the MBS to the banks/brokers that sold the loans to the borrowers that took the money.

This is a simple overview and I left out some steps, I am sure some will add more
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Old 08-07-2008, 04:35 PM
 
Location: N of citrus, S of decent corn
34,544 posts, read 42,708,506 times
Reputation: 57194
I think it started when every Tom, Dick and Harry started being a mortgage broker. When people in sales have the leeway to make the sale, regardless of the soundness of the transaction, then prudence goes out the window.
Look at how many car dealers there are now who need to place devices in the used cars they sell with kill switches that make the car not run if the buyers are delinquent.
We were better off when folks had to adhere to strict guidelines to obtain loans of any kind.
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Old 08-08-2008, 09:43 AM
 
Location: Great State of Texas
86,093 posts, read 69,881,813 times
Reputation: 27519
Regulations were loosened and many people took advantage of that from all sides.
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Old 08-08-2008, 12:11 PM
 
25,339 posts, read 37,471,570 times
Reputation: 13261
I just read that in The Netherlands, mortgage brokers soon can't take extra profits from closing some mortgages...which makes them IMO more honest to give them good advise instead trying to get people in mortgages that is given the mortgage broker the best profit, which probable aren't the best mortgages for the buyer.

I don't know how much profits and different profits some mortgage brokers got for closing an ARM....and what will happen when the buyer is find to have lied on their application...and what if the mortgage broker could have known that a for example a Walmart employee is not making $ 80 K a year....will both be responsible?
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Old 08-08-2008, 12:13 PM
 
16,700 posts, read 18,913,643 times
Reputation: 6797
Quote:
Originally Posted by rcarrillo View Post
In the olden days, the money came from deposits at a bank. So a bank takes a customers money in checking, savings, money market and CD accounts. They might give the account holder some small 1-2% interest on it. Then they turn around and loan money on mortgages, auto loans, credit cards, installment loans, etc. The difference between the two is their revenue, out of which they paid expenses and losses on bad loans... the amount left over was the profit. On many portfolio loan products (or with credit unions), this is still the case.

Then there are loans that lenders sell on the secondary market to wall street. Subprime and A- loans were packaged by investment firms into MBS (mortgage backed securities) and sold to investors. They didn't sell just 1 loan, they pooled 100s of loans into these big packages that were supposed to be about the same risk level... one mistake is that often there was a mix of junk loans and average loans in a pool. So the lender never really had the money in their possesion. They borrowed from other banks (like CountryWide) or the investment banks fromw what was called a warehouse line, closed the loans and immediately sold them to the investment banks to pool and sell to investors around the world.

Another problem was as you can see there was less liability or interest in standards because the loans were made and sold quickly. The lender didn't have to worry about the performance over 10-20 years or the cost of servicing the loan, they made their profit quick and moved on to the next sale. It helped lower overheads and increase efficiency so there were benefits... but it added a lot of risk and led to a competition based on price and speed, not on service, value, or long term-sustainability.

Many people jumped into the business as "sales people". They didn't need to learn the financial benefits or risks of a product, just how to sell it. There was no need to be a professional when it became a race to the lowest price and all buyers would ask was "how much can I buy" and "what rate do you have"? The greed went from Wall Street making a profit on the sale of the MBS to the banks/brokers that sold the loans to the borrowers that took the money.

This is a simple overview and I left out some steps, I am sure some will add more
Very good, I would add that these investors soon found out they were lied to by corporations and also by the government-backed corporations on the "security" of these investments. Soon enough the investors started losing money when these homes foreclosed making a lot of these securities almost worthless as home prices plummeted and nobody is buying these securities anymore... So without new capital from the securities (i.e. investors), nobody is making as many loans anymore and because there is less capital, the corporations (lenders) now want higher restrictions to decrease their risk as they rebuild... if there was a lot more capital, you will see a lot of laxity in lending rules... The homeowners are part of the "securities" and thus when the securities depend on the increase mortgage rates (ARM mortgages) to make money and there isn't any money made by government intervention (lowered principal and interest rates) nobody is going to buy these securities anymore.... however the homeowners also can't afford increase interest rates so the securities don't make money if there was no government intervention and face losing lots of money from the foreclosure.... If the ARM mortgages are refinanced by the government, the investors take less risk BUT also make a lot less money which is not why they invested in the first place.... thereby they are leaving the market in droves and decreasing the capital to continue the process.

1) Decrease in investors to raise capital to make new mortgage loans.

2) Toxic securities already in market dragging down the economy.

3) Homeowners can't afford higher interest rates on overpriced homes.

4) Government probably going to spend trillions of dollars to prevent the economy from going under, thereby decreasing the worth of the dollar.

5) Rapid inflation on necessities.

6) Increase unemployment as a result of the economic downturn.

7) Mortgage rates are continuing to increase, thereby is still unaffordable to the average household income. Home prices are still too high and are being kept artificially high by government entities.

8) The loss in value of the homes and less homeowners means less property tax to pay for local and state governments.

9) Recessive-style economy is putting a dent in spending as households can't afford luxuries as much anymore.

10) State and Federal government overspent when economies were good and have to cut jobs and social programs when the economy plummeted.

How did this all started? When Bush told the lenders to make more loans to "poor" people so that America can have more homeowners. Corporations begin to make "bad" loans and thought they could get away with it because the government told them it was okay. Well, it wasn't okay... I blame it on the Big Business/Big Government collusion and taxpayers are paying for it... We need to separate the two...
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Old 08-08-2008, 12:14 PM
 
Location: Stanwood, Washington
658 posts, read 613,345 times
Reputation: 172
The responsibility sits squarely on the shoulders of the borrowers who signed up to pay more than they could afford. Greed.
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Old 08-08-2008, 01:38 PM
 
2,141 posts, read 6,249,658 times
Reputation: 586
This mess was hedgefunds, ignorence and the Federal Reserve!!
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Old 08-08-2008, 03:02 PM
 
Location: Sugar Land, TX, USA
759 posts, read 2,837,540 times
Reputation: 232
You first have to blame the Lobbyist in Congress and The Shyster Lawyers...that pushed to lower the amount of documentation, verification, and down payment amounts so that people who would never in a million years could qualify for a home where getting loans. They were going to push discrimination lawsuits, because some shyster got some rat B*** accountant to crunch the numbers to show that they could move forth with a class action suit...and there you have it...This was really bad in California and Florida. People that were making 80-100 were getting approval for 800-900K homes on this wonderful thing called interest only ARM :P. It works for a short time until the bubble pops. There should be no reason to bail anyone out using our hard earned money i.e. Taxes. those that got taken had a hard lesson to learn. and the banks that can't survive, let them fail so that only the strong are left. But no...that is not the way we operate. The Socialist in control of Congress will bail everyone out and continue to increase the deficit...I spent a lot of time talking to a friend who also is a Professor of economic at a Ivy league school. We came to the same conclusion both Demoncrat and Recrapican are owned by these lobbyist and special interest. No one in Congress care for the American people.
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Old 08-08-2008, 04:12 PM
 
2,141 posts, read 6,249,658 times
Reputation: 586
Quote:
Originally Posted by icon7 View Post
You first have to blame the Lobbyist in Congress and The Shyster Lawyers...that pushed to lower the amount of documentation, verification, and down payment amounts so that people who would never in a million years could qualify for a home where getting loans. They were going to push discrimination lawsuits, because some shyster got some rat B*** accountant to crunch the numbers to show that they could move forth with a class action suit...and there you have it...This was really bad in California and Florida. People that were making 80-100 were getting approval for 800-900K homes on this wonderful thing called interest only ARM :P. It works for a short time until the bubble pops. There should be no reason to bail anyone out using our hard earned money i.e. Taxes. those that got taken had a hard lesson to learn. and the banks that can't survive, let them fail so that only the strong are left. But no...that is not the way we operate. The Socialist in control of Congress will bail everyone out and continue to increase the deficit...I spent a lot of time talking to a friend who also is a Professor of economic at a Ivy league school. We came to the same conclusion both Demoncrat and Recrapican are owned by these lobbyist and special interest. No one in Congress care for the American people.
So True!
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