Post by the Scribe on Apr 15, 2020 6:22:34 GMT
Who Benefited and Who Got Hurt?
prospect.org/infrastructure/conservative-origins-sub-prime-mortgage-crisis/
Mortgage brokers, who occupy an unregulated niche of the lending world, made a commission for every borrower they handed over to a mortgage lender. These brokers are like the drug dealers on the street corner. They are the smallest link in a lending chain that includes some of the largest and most respectable Wall Street firms.
Large mortgage finance companies and banks made big bucks on sub-prime loans. Last year, 10 lenders -- Countywide, New Century, Option One, Fremont, Washington Mutual, First Franklin, RFC, Lehman Brothers, WMC Mortgage, and Ameriquest -- accounted for 59 percent of all sub-prime loans, totaling $284 billion.
Wall Street investment firms set up special investment units, bought the sub-prime mortgages from the lenders, bundled them into "mortgage-backed securities," and for a fat fee sold them to wealthy investors around the world. According to The New York Times, China's second-largest bank, Bank of China Ltd, held almost $9.7 billion of securities backed by U.S. sub-prime loans. These investors, who bought the collateralized securities, were happy as long as they got paid their higher interest on the bonds or other investments.
With the bottom falling out of the sub-prime market, more than 80 mortgage companies went under in the past six months. Major Wall Street firms took billion-dollar losses as the crisis ripped into foreign money markets, from London to Shanghai. Lehman Brothers underwrote $51.8 billion in securities backed by sub-prime loans in 2006 alone; as of September, 20 percent of those loans were in default, the Times reported. Similarly, about one-fifth of the sub-prime loans packaged by Morgan Stanley, Barclays, Merrill Lynch, Bear Stearns, Goldman Sachs, Deutsche Bank, Credit Suisse, RBS, Countrywide, JP Morgan, and Citigroup are 60 or more days delinquent, in foreclosure, or involve homes that have already been repossessed.
The executives and officers of some mortgage finance companies cashed out before the market crashed. The poster boy is Angelo Mozilo, the CEO of Countrywide Financial, the largest sub-prime lender. He made more than $270 million in profits selling stocks and options from 2004 to the beginning of 2007. And the three founders of New Century Financial, the second largest sub-prime lender, together realized $40 million in stock-sale profits between 2004 and 2006. Paul Krugman reported in The New York Times that last year the chief executives of Merrill-Lynch and Citigroup were paid $48 million and $25.6 million, respectively.
The hardest hit are the innocent borrowers of sub-prime loans. Many of them are working- and middle-class families who fell victim to the country's economic squeeze, a hardship not of their own doing but a symptom of the Bush years. They faced layoffs, stagnant wages, and rising costs of home heating, gasoline, utilities, food, and child care. For those without health insurance, one serious medical problem wiped out their savings. At a time when soaring housing prices were out of whack with the rest of the economy, sub-prime loans were the only way they could purchase a home. But when they could no longer keep up their mortgage payments, they had no safety net. They began skipping their monthly mortgage payments, especially after the adjustable-rate mortgages kicked in with higher interest rates, as high as a 30 percent spike for some borrowers.
Lenders sent letters threatening to take their homes in foreclosure if they didn't pay up. But for millions of families, the harsh warnings didn't matter. They couldn't refinance out of high-interest adjustable-rate mortgages because the value of their home had dropped below the outstanding mortgage or because they just didn't have the money. And they couldn't tap into a government aid program for at-risk homeowners facing foreclosure because none existed.
Those who deserve our greatest sympathy are the victims of predatory lending, a segment of the sub-prime market that involves deceptive practices by lenders, as well as unconscionable high fees and interest rates, sometimes running well over 22 percent. Predatory lenders range from sleazy operators in the financial netherworld to mainstream financial institutions like Household Finance. These lenders typically have salespeople who hound vulnerable families for months, soliciting and encouraging them to take out a loan to buy a house or refinance. Borrowers are charged hidden high fees, labeled with confusing terms like "discount points," suggesting that the fees will lower the interest rates, which they don't.
Predatory loans sometimes involve a conspiracy between loan agents and unscrupulous home-improvement contractors, as well as appraisers who inflate the value of a house so that families will borrow more than the houses are really worth. Predatory mortgages often include last-minute, hidden second mortgages. Using bait-and-switch tactics, predatory lenders tout low interest rates in ads targeting the elderly and residents of low-income, working-class, and minority neighborhoods, without explaining the actual interest rates or that adjustable-rate mortgages mean that the rates will increase.
Borrowers are enticed with deals that require them to pay little or nothing down. The unscrupulous lenders approve borrowers for loans even if they've recently been bankrupt or don't have sufficient income to keep up the payments. These lenders don't document an applicant's ability to pay back a loan. They often just accept the borrower's word about his income and expenses. "You could be dead and get a loan," a mortgage broker told Holden Lewis of Bankrate.com, a leading Web source for financial rate information.
Predatory lenders turn lending logic on its head. Instead of cautiously making loans to people who can repay them, they get their money by lending to people who are unable to repay. The loans are structured to guarantee failure. Predatory lenders get borrowers to agree to an adjustable-rate mortgage without explaining how it works, including the big bump in rates with a few years after taking out the loan. Borrowers suckered by predatory lenders often wind up having a monthly mortgage payment that is more than half their income. A predatory loan is often for more than the value of the house. The victims of predatory loans frequently don't realize they've been snookered until they're about to lose their homes.
Not all sub-prime borrowers are innocent victims. Some were speculators themselves, seeking to profit from the real estate housing bubble, and had their eyes wide open. They expected to rent their houses or quickly "flip" them to another buyer in a rising housing market. Others were simply living dangerously above their means, taking on too much debt and occupying houses that, by any reasonable standard, they couldn't really afford. These borrowers should live with the consequences of their behavior, not be rewarded with any help.
next conservatism.freeforums.net/thread/875/where
prospect.org/infrastructure/conservative-origins-sub-prime-mortgage-crisis/
Mortgage brokers, who occupy an unregulated niche of the lending world, made a commission for every borrower they handed over to a mortgage lender. These brokers are like the drug dealers on the street corner. They are the smallest link in a lending chain that includes some of the largest and most respectable Wall Street firms.
Large mortgage finance companies and banks made big bucks on sub-prime loans. Last year, 10 lenders -- Countywide, New Century, Option One, Fremont, Washington Mutual, First Franklin, RFC, Lehman Brothers, WMC Mortgage, and Ameriquest -- accounted for 59 percent of all sub-prime loans, totaling $284 billion.
Wall Street investment firms set up special investment units, bought the sub-prime mortgages from the lenders, bundled them into "mortgage-backed securities," and for a fat fee sold them to wealthy investors around the world. According to The New York Times, China's second-largest bank, Bank of China Ltd, held almost $9.7 billion of securities backed by U.S. sub-prime loans. These investors, who bought the collateralized securities, were happy as long as they got paid their higher interest on the bonds or other investments.
With the bottom falling out of the sub-prime market, more than 80 mortgage companies went under in the past six months. Major Wall Street firms took billion-dollar losses as the crisis ripped into foreign money markets, from London to Shanghai. Lehman Brothers underwrote $51.8 billion in securities backed by sub-prime loans in 2006 alone; as of September, 20 percent of those loans were in default, the Times reported. Similarly, about one-fifth of the sub-prime loans packaged by Morgan Stanley, Barclays, Merrill Lynch, Bear Stearns, Goldman Sachs, Deutsche Bank, Credit Suisse, RBS, Countrywide, JP Morgan, and Citigroup are 60 or more days delinquent, in foreclosure, or involve homes that have already been repossessed.
The executives and officers of some mortgage finance companies cashed out before the market crashed. The poster boy is Angelo Mozilo, the CEO of Countrywide Financial, the largest sub-prime lender. He made more than $270 million in profits selling stocks and options from 2004 to the beginning of 2007. And the three founders of New Century Financial, the second largest sub-prime lender, together realized $40 million in stock-sale profits between 2004 and 2006. Paul Krugman reported in The New York Times that last year the chief executives of Merrill-Lynch and Citigroup were paid $48 million and $25.6 million, respectively.
The hardest hit are the innocent borrowers of sub-prime loans. Many of them are working- and middle-class families who fell victim to the country's economic squeeze, a hardship not of their own doing but a symptom of the Bush years. They faced layoffs, stagnant wages, and rising costs of home heating, gasoline, utilities, food, and child care. For those without health insurance, one serious medical problem wiped out their savings. At a time when soaring housing prices were out of whack with the rest of the economy, sub-prime loans were the only way they could purchase a home. But when they could no longer keep up their mortgage payments, they had no safety net. They began skipping their monthly mortgage payments, especially after the adjustable-rate mortgages kicked in with higher interest rates, as high as a 30 percent spike for some borrowers.
Lenders sent letters threatening to take their homes in foreclosure if they didn't pay up. But for millions of families, the harsh warnings didn't matter. They couldn't refinance out of high-interest adjustable-rate mortgages because the value of their home had dropped below the outstanding mortgage or because they just didn't have the money. And they couldn't tap into a government aid program for at-risk homeowners facing foreclosure because none existed.
Those who deserve our greatest sympathy are the victims of predatory lending, a segment of the sub-prime market that involves deceptive practices by lenders, as well as unconscionable high fees and interest rates, sometimes running well over 22 percent. Predatory lenders range from sleazy operators in the financial netherworld to mainstream financial institutions like Household Finance. These lenders typically have salespeople who hound vulnerable families for months, soliciting and encouraging them to take out a loan to buy a house or refinance. Borrowers are charged hidden high fees, labeled with confusing terms like "discount points," suggesting that the fees will lower the interest rates, which they don't.
Predatory loans sometimes involve a conspiracy between loan agents and unscrupulous home-improvement contractors, as well as appraisers who inflate the value of a house so that families will borrow more than the houses are really worth. Predatory mortgages often include last-minute, hidden second mortgages. Using bait-and-switch tactics, predatory lenders tout low interest rates in ads targeting the elderly and residents of low-income, working-class, and minority neighborhoods, without explaining the actual interest rates or that adjustable-rate mortgages mean that the rates will increase.
Borrowers are enticed with deals that require them to pay little or nothing down. The unscrupulous lenders approve borrowers for loans even if they've recently been bankrupt or don't have sufficient income to keep up the payments. These lenders don't document an applicant's ability to pay back a loan. They often just accept the borrower's word about his income and expenses. "You could be dead and get a loan," a mortgage broker told Holden Lewis of Bankrate.com, a leading Web source for financial rate information.
Predatory lenders turn lending logic on its head. Instead of cautiously making loans to people who can repay them, they get their money by lending to people who are unable to repay. The loans are structured to guarantee failure. Predatory lenders get borrowers to agree to an adjustable-rate mortgage without explaining how it works, including the big bump in rates with a few years after taking out the loan. Borrowers suckered by predatory lenders often wind up having a monthly mortgage payment that is more than half their income. A predatory loan is often for more than the value of the house. The victims of predatory loans frequently don't realize they've been snookered until they're about to lose their homes.
Not all sub-prime borrowers are innocent victims. Some were speculators themselves, seeking to profit from the real estate housing bubble, and had their eyes wide open. They expected to rent their houses or quickly "flip" them to another buyer in a rising housing market. Others were simply living dangerously above their means, taking on too much debt and occupying houses that, by any reasonable standard, they couldn't really afford. These borrowers should live with the consequences of their behavior, not be rewarded with any help.
next conservatism.freeforums.net/thread/875/where