Credit where credit is due: Who caused the Mortgage Crisis?
Bryan Belrad
January 27, 2008
As the mortgage crisis in the United States continues to worsen (now, one in six homes are in danger of foreclosure), it seems everyone is scrambling for a scapegoat or alibi.
Like all disasters that impact a large portion of the nation´s population, or the economy, the issue of ´who is to blame´ has quickly transformed into a political matter. Predictably, the talkers of the Right are stepping up to defend interests of business, while the Left lines up behind whoever seems to be the most vulnerable underdog.
As with most such things, one side can easily accuse the other of ´blaming the victim´, and this seems especially true in this case. Is it the fault of a hiker who steps into a bear trap for not looking where he was going, or is the trapper to blame, for laying a hazard so close to a nature trail?
So too is the muddled matter of the mortgage market. Did too many people try to bite off more than they can chew? Or are the banks succumbing to the siren song of greed?
In all honesty, the truth is most probably a bit of both. However, it does seem strange that so many people would all of a sudden up and sign for mortgages that they know they can´t afford - all at once.
Call me a liberal, but I believe in giving credit where credit is due. Something had to change to make it possible for all these people who can´t afford their homes to suddenly be eligible for mortgages. What gives?
According to federal reports, better than 50% of mortgages in 2006 were enacted with down payments of 5% or less. Incidentally, until two years ago, it was nearly impossible for anyone who didn´t have AAA credit AND a hefty income to qualify for a mortgage like that.
What changed? According to Mike Colpitts, editor of Housing Predictor, "Mortgages were made to many subprime borrowers that adjusted upward to unrealistically high payments within a couple of years and thousands of mortgage agents and mortgage brokers working on commission cooked the applications to make more conventional ´Junk Mortgages´ that should have never been made in the first place."
In short, loan sharking has become a standard business practice in American Banking.
For example, let us consider a recent lawsuit involving Wells Fargo Home Mortgage. According to court documents, Wells Fargo artificially and fraudulently inflated the escrow portion of the borrower´s mortgage payment four times within the first year. What´s worse, the first such ´adjustment´, which was made within a month of the signing date, more than doubled the total payment.
Personally, I don´t know anyone who can long survive a mortgage payment that doubles within the first month, and continues rising regularly. In this case, the sum of the total payment had reached nearly 300% of the original agreed upon amount before the first year was up.
There are many ways a lender can be predatory. A bank can ´strip equity´, with exorbitant fees forced on a signer at the closing table. Bank "errors" can keep payments from being properly credited to an account, forcing a borrower to refinance to prevent foreclosure (which gets the bank its money back, with a hefty instant-profit from closing). They can pursue a reverse tactic, and apply all manner of hidden fees to prevent a borrower from refinancing out of the loan.
This particular case illustrates a new kind of bank fraud: escrow extortion. What happens here is the bank "accidentally" overpays the taxes due on the mortgaged home, never credits the refunds, and charges the borrower for the difference by raising the payment.
Technically, this could be considered a form of embezzlement, but there´s a way around that. They give the money back (sort of) – after the home has been foreclosed on.
"But wait," you might be asking, "isn´t that suggesting that the bank is trying to force the borrower into a foreclosure?"
Why, yes; I´m glad you asked. This is how it works: The mortgage broker throws scores of ´junk´ fees into a loan in order to maximize his own commission, and max out the mortgage itself. The bank realizes a titanic profit the instant the mortgage is signed. The broker also throws in an ´interest rate saver´ clause, which drops the rate on the loan to 1% less of whatever artificially high number had already been decided, in return for a time stipulation on the loan itself.
In layman´s terms: you get cheated a little bit less if you agree not to refinance for X years. The trick to it is that it´s a magician´s illusion. While you, as the borrower, are watching the interest rate, you´re not looking at the stiff penalty that applies if you DO refinance before the time limit is up.
From there, the bank then manipulates the borrower´s escrow account. This serves two purposes. First, it forces the borrower closer and closer to ultimate financial ruin – and thus, foreclosure. Second, it depletes every bit of savings the borrower might have remaining after making the down payment, thus removing any chance the borrower might have of getting out of the mortgage, or for funding a defense in court when foreclosure does come.
Meanwhile, the bank is building up a huge stockpile of the borrower´s money, in the form of ´not-embezzled´ escrow funds. This becomes important later.
By contrast, the conventional wisdom says that it is adjustable interest rates that are wiping out all these mortgages. If this is even partly correct, a one or two percent shift upward would translate to $50-300 more per month. Compare the hardship caused by that with the payment outright tripling. In the case mentioned here, the interest rate never even had a chance to adjust.
Inevitably, this practice will force the borrower into foreclosure. If doubling the payment doesn´t do the trick, then the payment will be increased, again and again, until, eventually, the borrower simply can not make the payment any more.
Again, conventional wisdom is counter-intuitive. Most people know that following a foreclosure, a bank sells the confiscated property at auction. We´ve all heard the commercials, "huge savings," and, "pennies on the dollar." Because of this, we assume that banks generally prefer to avoid foreclosures. This could not be further from the truth.
Today, when a bank forecloses on a property, they will happily accept pretty much any amount offered. In fact, for the best possible outcome, they need the mortgage to be left with a deficiency balance.
Of course, the foreclosing attorney wants to be paid right away. That´s where that escrow ´not-embezzled´ reserve fund comes in. They still have to refund that to the borrower, because they really did over-bill to obtain it. But, according to the terms of the foreclosure judgment, the borrower has to pay the bank´s legal fees. The simple solution: pay the lawyer with the money they stole from the borrower to begin with.
Now, the lawyer is paid (by the borrower, in a round about way), the property is sold, and there is even more money owed on the mortgage than ever before. It doesn´t matter how much the property sells for – they will find fees to negate the entire proceeds, thus further padding their bottom line with a quick profit of thousands of dollars.
So, they´ve absconded with every penny the borrower has, and money is still left owing. Now they write off the leftovers and take a tax-deductible loss, right? Wrong. That´s where common sense fails. When a bank that is FDIC ensured suffers a loss within a certain range (a mortgage-sized range), the government steps in and reimburses them every red cent – including the money they would have made in interest, had the loan survived its term.
Given that, that a bank can make a huge profit on ´junk fees´ at signing, pick up a few extra fees along the way, effectively foreclose for free, make another titanic profit off of the sale of the property, and then get all ´their´ money back – from the taxpayers – including the ´lost´ interest, the question isn´t ´why would a bank want to force a foreclosure?´ It is ´why wouldn´t they?"
Federal banking regulations make it illegal to force a foreclosure, or to even use certain practices deemed ´predatory´. To avoid these profit-eating regulations, banks have to become more and more devious. In many cases, they have no choice but to let a loan run its course, and take the standard profit. But the wonderful world of sub-prime mortgages has opened up a whole new horizon to them; a lovely place of pure profit, where extortion and fraud rule, and no one has the resources to sue them for the robbery they commit under the guise of financing.
In a few rare cases, as the one mentioned previously, banks like Wells Fargo do get sued. However, with a veritable army of lawyers, and endless coffers to finance their war efforts, such suits almost never pan out. In the odd occasion where one of their victims does win, it really doesn´t matter.
Millions of 30 year loans turned over in 2-3 years, with gigantic ´shock´ profits on both ends, have filled banks like Wells Fargo´s purses so deeply that a $10 million verdict against them doesn´t even cause a flinch in their stock´s market value.
Even class-action suits, like the one currently being sponsored by the city of Baltimore, also against Wells Fargo, don´t register as a blip on their bottom line.
So let´s give credit where credit is due. Is the current financial crisis really due to people borrowing more than they can afford? Considering that banks are supposed to screen candidates for loans via their applications, credit, and income levels, how could that possibly be the case, unless the banks wanted people to not be able to afford their homes?
The escrow scam detailed here is just one of the mortgage industry´s latest tricks. They have scores more, and the fact that they have developed so many gives us a conclusive answer to the ultimate question of who is responsible for our newest national economic crisis.
The bottom is falling out of the market, not because of rising interest rates or irresponsibility on the part of some borrowers – those factors are just drops in the bucket, but because the mortgage bankers themselves have ripped the bottom out with a crowbar of gold. While tens, if not hundreds, of millions of Americans suffer through the nightmare of wrongful foreclosure, and all of us pay the price in government ´protection´ against the bankers´ "losses" (to prevent an economic collapse, of course), today´s Kings of Greed make out like the Robber Barons of old.
Welcome to the new United States of America, property of Wells Fargo.
Like all disasters that impact a large portion of the nation´s population, or the economy, the issue of ´who is to blame´ has quickly transformed into a political matter. Predictably, the talkers of the Right are stepping up to defend interests of business, while the Left lines up behind whoever seems to be the most vulnerable underdog.
As with most such things, one side can easily accuse the other of ´blaming the victim´, and this seems especially true in this case. Is it the fault of a hiker who steps into a bear trap for not looking where he was going, or is the trapper to blame, for laying a hazard so close to a nature trail?
So too is the muddled matter of the mortgage market. Did too many people try to bite off more than they can chew? Or are the banks succumbing to the siren song of greed?
In all honesty, the truth is most probably a bit of both. However, it does seem strange that so many people would all of a sudden up and sign for mortgages that they know they can´t afford - all at once.
Call me a liberal, but I believe in giving credit where credit is due. Something had to change to make it possible for all these people who can´t afford their homes to suddenly be eligible for mortgages. What gives?
According to federal reports, better than 50% of mortgages in 2006 were enacted with down payments of 5% or less. Incidentally, until two years ago, it was nearly impossible for anyone who didn´t have AAA credit AND a hefty income to qualify for a mortgage like that.
What changed? According to Mike Colpitts, editor of Housing Predictor, "Mortgages were made to many subprime borrowers that adjusted upward to unrealistically high payments within a couple of years and thousands of mortgage agents and mortgage brokers working on commission cooked the applications to make more conventional ´Junk Mortgages´ that should have never been made in the first place."
In short, loan sharking has become a standard business practice in American Banking.
For example, let us consider a recent lawsuit involving Wells Fargo Home Mortgage. According to court documents, Wells Fargo artificially and fraudulently inflated the escrow portion of the borrower´s mortgage payment four times within the first year. What´s worse, the first such ´adjustment´, which was made within a month of the signing date, more than doubled the total payment.
Personally, I don´t know anyone who can long survive a mortgage payment that doubles within the first month, and continues rising regularly. In this case, the sum of the total payment had reached nearly 300% of the original agreed upon amount before the first year was up.
There are many ways a lender can be predatory. A bank can ´strip equity´, with exorbitant fees forced on a signer at the closing table. Bank "errors" can keep payments from being properly credited to an account, forcing a borrower to refinance to prevent foreclosure (which gets the bank its money back, with a hefty instant-profit from closing). They can pursue a reverse tactic, and apply all manner of hidden fees to prevent a borrower from refinancing out of the loan.
This particular case illustrates a new kind of bank fraud: escrow extortion. What happens here is the bank "accidentally" overpays the taxes due on the mortgaged home, never credits the refunds, and charges the borrower for the difference by raising the payment.
Technically, this could be considered a form of embezzlement, but there´s a way around that. They give the money back (sort of) – after the home has been foreclosed on.
"But wait," you might be asking, "isn´t that suggesting that the bank is trying to force the borrower into a foreclosure?"
Why, yes; I´m glad you asked. This is how it works: The mortgage broker throws scores of ´junk´ fees into a loan in order to maximize his own commission, and max out the mortgage itself. The bank realizes a titanic profit the instant the mortgage is signed. The broker also throws in an ´interest rate saver´ clause, which drops the rate on the loan to 1% less of whatever artificially high number had already been decided, in return for a time stipulation on the loan itself.
In layman´s terms: you get cheated a little bit less if you agree not to refinance for X years. The trick to it is that it´s a magician´s illusion. While you, as the borrower, are watching the interest rate, you´re not looking at the stiff penalty that applies if you DO refinance before the time limit is up.
From there, the bank then manipulates the borrower´s escrow account. This serves two purposes. First, it forces the borrower closer and closer to ultimate financial ruin – and thus, foreclosure. Second, it depletes every bit of savings the borrower might have remaining after making the down payment, thus removing any chance the borrower might have of getting out of the mortgage, or for funding a defense in court when foreclosure does come.
Meanwhile, the bank is building up a huge stockpile of the borrower´s money, in the form of ´not-embezzled´ escrow funds. This becomes important later.
By contrast, the conventional wisdom says that it is adjustable interest rates that are wiping out all these mortgages. If this is even partly correct, a one or two percent shift upward would translate to $50-300 more per month. Compare the hardship caused by that with the payment outright tripling. In the case mentioned here, the interest rate never even had a chance to adjust.
Inevitably, this practice will force the borrower into foreclosure. If doubling the payment doesn´t do the trick, then the payment will be increased, again and again, until, eventually, the borrower simply can not make the payment any more.
Again, conventional wisdom is counter-intuitive. Most people know that following a foreclosure, a bank sells the confiscated property at auction. We´ve all heard the commercials, "huge savings," and, "pennies on the dollar." Because of this, we assume that banks generally prefer to avoid foreclosures. This could not be further from the truth.
Today, when a bank forecloses on a property, they will happily accept pretty much any amount offered. In fact, for the best possible outcome, they need the mortgage to be left with a deficiency balance.
Of course, the foreclosing attorney wants to be paid right away. That´s where that escrow ´not-embezzled´ reserve fund comes in. They still have to refund that to the borrower, because they really did over-bill to obtain it. But, according to the terms of the foreclosure judgment, the borrower has to pay the bank´s legal fees. The simple solution: pay the lawyer with the money they stole from the borrower to begin with.
Now, the lawyer is paid (by the borrower, in a round about way), the property is sold, and there is even more money owed on the mortgage than ever before. It doesn´t matter how much the property sells for – they will find fees to negate the entire proceeds, thus further padding their bottom line with a quick profit of thousands of dollars.
So, they´ve absconded with every penny the borrower has, and money is still left owing. Now they write off the leftovers and take a tax-deductible loss, right? Wrong. That´s where common sense fails. When a bank that is FDIC ensured suffers a loss within a certain range (a mortgage-sized range), the government steps in and reimburses them every red cent – including the money they would have made in interest, had the loan survived its term.
Given that, that a bank can make a huge profit on ´junk fees´ at signing, pick up a few extra fees along the way, effectively foreclose for free, make another titanic profit off of the sale of the property, and then get all ´their´ money back – from the taxpayers – including the ´lost´ interest, the question isn´t ´why would a bank want to force a foreclosure?´ It is ´why wouldn´t they?"
Federal banking regulations make it illegal to force a foreclosure, or to even use certain practices deemed ´predatory´. To avoid these profit-eating regulations, banks have to become more and more devious. In many cases, they have no choice but to let a loan run its course, and take the standard profit. But the wonderful world of sub-prime mortgages has opened up a whole new horizon to them; a lovely place of pure profit, where extortion and fraud rule, and no one has the resources to sue them for the robbery they commit under the guise of financing.
In a few rare cases, as the one mentioned previously, banks like Wells Fargo do get sued. However, with a veritable army of lawyers, and endless coffers to finance their war efforts, such suits almost never pan out. In the odd occasion where one of their victims does win, it really doesn´t matter.
Millions of 30 year loans turned over in 2-3 years, with gigantic ´shock´ profits on both ends, have filled banks like Wells Fargo´s purses so deeply that a $10 million verdict against them doesn´t even cause a flinch in their stock´s market value.
Even class-action suits, like the one currently being sponsored by the city of Baltimore, also against Wells Fargo, don´t register as a blip on their bottom line.
So let´s give credit where credit is due. Is the current financial crisis really due to people borrowing more than they can afford? Considering that banks are supposed to screen candidates for loans via their applications, credit, and income levels, how could that possibly be the case, unless the banks wanted people to not be able to afford their homes?
The escrow scam detailed here is just one of the mortgage industry´s latest tricks. They have scores more, and the fact that they have developed so many gives us a conclusive answer to the ultimate question of who is responsible for our newest national economic crisis.
The bottom is falling out of the market, not because of rising interest rates or irresponsibility on the part of some borrowers – those factors are just drops in the bucket, but because the mortgage bankers themselves have ripped the bottom out with a crowbar of gold. While tens, if not hundreds, of millions of Americans suffer through the nightmare of wrongful foreclosure, and all of us pay the price in government ´protection´ against the bankers´ "losses" (to prevent an economic collapse, of course), today´s Kings of Greed make out like the Robber Barons of old.
Welcome to the new United States of America, property of Wells Fargo.
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