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Us Subprime - Underwater From The Start

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I'm looking for some articles on the US subprime debacle, I've recently read that some "homeowners" were sold mortgages that they couldn't afford from the start. I'm not on about the crazy excessess about someone getting a $700k on a $20k salary but people who were sold a mortgage and couldn't meet even the first mortgage payment.

I thought I'd saved the link, but I've been searching through my notes and I think stupidly I didn't make a note of were I read it.

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I believe it goes back to the Clinton era and the political correct / diversity monster. Not enough poor people and especially those in black/ethnic communities were able to get a mortgage. It boiled down to lending people money they couldn't afford to pay back and the political need that any risk to the buyer be minimised. Good politics but unsound economics.

Talk too about the low upfront cost of such mortgages in the first few years.

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I used to get hundreds of spam messages from the US telling me that I had been pre approved for a $500,000 Mortgage.

Never did figure out a way of getting my hands on the money.

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..think Wiki on Sub Prime is a good start ...and will help you trace articles of the day ...even the FBI was warning of mortgage fraud in the Sub Prime market back then....and one would ask who is protecting who when so few have been held to account apart from smoke and mirrors banking fines.... :rolleyes:

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

Edited by South Lorne

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I'm looking for some articles on the US subprime debacle, I've recently read that some "homeowners" were sold mortgages that they couldn't afford from the start. I'm not on about the crazy excessess about someone getting a $700k on a $20k salary but people who were sold a mortgage and couldn't meet even the first mortgage payment.

I thought I'd saved the link, but I've been searching through my notes and I think stupidly I didn't make a note of were I read it.

..here is another useful link...

http://www.businessweek.com/the_thread/hotproperty/archives/2008/02/clintons_drive.html

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Thanks for the links. Although I still haven't found the article which I'm sure said some people selling the loans sold them to people who couldn't afford to meet the first payment let alone when the loan actually reset.

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'How bad loans in the US infected the world' taken from the Guardian - 17 August 2007

US Bad Loans - Guardian 17aug07.jpg

post-10429-0-94891000-1420375347_thumb.jpg

Edited by tinker

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Thanks for the links. Although I still haven't found the article which I'm sure said some people selling the loans sold them to people who couldn't afford to meet the first payment let alone when the loan actually reset.

You might be recalling an article on recent Morgan Stanley subprime court documents. Google something like that.

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You might be recalling an article on recent Morgan Stanley subprime court documents. Google something like that.

http://dealbook.nytimes.com/2014/12/29/court-filing-illuminates-morgan-role-in-lending/

Now, though, a trove of emails and confidential documents, filed in court, reveal the extent to which one of Wall Street’s leading banks, Morgan Stanley, actively influenced New Century’s push into riskier and more onerous mortgages, and brushed aside questions about the ability of homeowners to make the payments.

“Morgan Stanley is involved in almost every strategic decision that New Century makes in securitized products,” a Morgan Stanley internal report from late 2004 said, referring to the loans the bank packaged into mortgage bonds.

The Justice Department is currently examining the relationship between New Century and Morgan Stanley, and the bank’s sale of mortgage securities in the run-up to the financial crisis, according to a person briefed on the matter. After winning tens of billions of dollars from other banks, the Justice Department has turned its focus to Morgan Stanley, and is aiming to reach a settlement early next year, according to the person.

Thanks although this isn't what I read, as it was a bit more explicit but I just can't recall where I read it. I've been flicking through at least 12 books on the subject so it might have been in one of those, but I seem to recall it was whilst searching for something else I read a news article which said mortgages where sold to people who couldn't afford it from the start.

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http://fortune.com/2013/08/26/in-post-crisis-penalties-morgan-stanley-stands-alone/

Nonetheless, most of those loans, according to King County’s suit, made it into the deal. According to documents filed in the case, one of the loans Morgan Stanley included in the final deal was for $143,000 to buy a vacant lot. An independent broker valued the property at $11,000, according to court documents. Yet Morgan Stanley said the land was worth $183,000.

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http://www.washingtonpost.com/blogs/wonkblog/wp/2014/12/31/%E2%80%8Ba-half-decade-later-its-clear-wall-street-could-have-seen-the-housing-crash-coming/

Bankers, you might remember, are supposed to lend money to people who can — I know this might sound quaint — actually pay them back. And preferably with interest. But during the housing bubble's halcyon I'll-Be-Gone-You'll-Be-Gone days, bankers tried out an innovative new strategy where they loaned money to people who couldn't pay them back, sold these time-bombs-disguised-as-mortgages to Wall Street firms who cajoled the less-than-competent credit ratings agencies into giving them their top-rated AAA seal of approval, and then unloaded most of this junk on investors who thought they were buying super-safe securities.

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http://www.propublica.org/thetrade/item/explosive-charge-morgan-stanley-peddled-security-its-own-employee-called-nu

On March 16, 2007, Morgan Stanley employees working on one of the toxic assets that helped blow up the world economy discussed what to name it. Among the team members' suggestions: "Subprime Meltdown," "Hitman," "Nuclear Holocaust," "Mike Tyson's Punchout," and the simple-yet-direct: "Shitbag."

Ha ha. Those hilarious investment bankers.

Then they gave it its real name and sold it to a Chinese bank.

We are never going to have a full understanding of what bad behavior bankers conducted in the years leading up to the financial crisis. The Justice Department and the Securities and Exchange Commission have failed to hold big wrongdoers to account.

We are left with what scraps we can get from those private lawsuits lucky enough to get over the high hurdles for document discovery. A case brought in the New York State Supreme Court in Manhattan against Morgan Stanley by a Taiwanese bank, which bought a piece of the same deal the Chinese bank did, has cleared that bar.

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http://www.rollingstone.com/politics/news/matt-taibbi-courts-helping-banks-screw-over-homeowners-20101110

The foreclosure lawyers down in Jacksonville had warned me, but I was skeptical. They told me the state of Florida had created a special super-high-speed housing court with a specific mandate to rubber-stamp the legally dicey foreclosures by corporate mortgage pushers like Deutsche Bank and JP Morgan Chase. This "rocket docket," as it is called in town, is presided over by retired judges who seem to have no clue about the insanely complex financial instruments they are ruling on — securitized mortgages and laby­rinthine derivative deals of a type that didn't even exist when most of them were active members of the bench. Their stated mission isn't to decide right and wrong, but to clear cases and blast human beings out of their homes with ultimate velocity. They certainly have no incentive to penetrate the profound criminal mysteries of the great American mortgage bubble of the 2000s, perhaps the most complex Ponzi scheme in human history — an epic mountain range of corporate fraud in which Wall Street megabanks conspired first to collect huge numbers of subprime mortgages, then to unload them on unsuspecting third parties like pensions, trade unions and insurance companies (and, ultimately, you and me, as taxpayers) in the guise of AAA-rated investments. Selling lead as gold, shit as Chanel No. 5, was the essence of the booming international fraud scheme that created most all of these now-failing home mortgages.

Looting Main Street

The rocket docket wasn't created to investigate any of that. It exists to launder the crime and bury the evidence by speeding thousands of fraudulent and predatory loans to the ends of their life cycles, so that the houses attached to them can be sold again with clean paperwork. The judges, in fact, openly admit that their primary mission is not justice but speed. One Jacksonville judge, the Honorable A.C. Soud, even told a local newspaper that his goal is to resolve 25 cases per hour. Given the way the system is rigged, that means His Honor could well be throwing one ass on the street every 2.4 minutes.

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http://www.federalreserve.gov/boarddocs/speeches/2000/20001206.htm

December 6, 2000

Some of these practices are clearly illegal and can be combatted with legal enforcement measures. But some are more subtle, involving misuse of practices that can improve credit market efficiency most of the time. For example, the freedom for loan rates to rise above former usury law ceilings is mostly desirable, in matching relatively risky borrowers with appropriate lenders. But sometimes the payments implicit in very high interest rates can spell financial ruin for borrowers. Most of the time balloon payments make it possible for young homeowners to buy their first house and match payments with their rising income stream. But sometimes balloon payments can ruin borrowers who do not have a rising income stream and are unduly influenced by the up-front money. Most of the time the ability to refinance mortgages permits borrowers to take advantage of lower mortgage rates, but sometimes easy refinancing means high loan fees and unnecessary credit costs. Often mortgage credit insurance is desirable, but sometimes the insurance is unnecessary, and sometimes borrowers pay hefty premiums up-front and often as their loans are flipped.

Generally advertising enhances information, but sometimes it is deceptive. Most of the time disclosure of mortgage terms is desirable, but sometimes key points are hidden in the fine print. Apart from outright fraud, predatory lending often entails the abuse of complex mortgage provisions that are generally desirable and advantageous to a borrower, but only when they are fully understood by the borrower.

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https://www.bostonfed.org/commdev/c&b/2010/fall/Engel_McCoy_subprime_meltdown.pdf

Starting in the 1990s, there were whitepapers by consumer organizations and articles in newspapers about abuses in the subprime market. Consumer advocates repeatedly testified before House and Senate committees, citing evidence that, for example, home foreclosures had tripled between 1982 and 1997, high-cost subprime loans accounted for 22 percent of all foreclosures in 1998, and many subprime loans were simply unaffordable.

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http://voteview.com/DeBold_Predatory_Lending.pdf

However, as the subprime mortgage market rose so did allegations of predatory tactics or
predatory features in loans. Despite the difficulty in neatly summarizing predatory lending, Engel
and McCoy (2007) offered a wide definition in their paper on Wall Street financing of predatory
loans: (1) loans structured to cause disproportionate harm to borrowers; (2) rent-seeking; (3)
illegal fraud or deception; (4) other information asymmetries favoring brokers or lenders; (5)
mandatory arbitration clauses; (6) lending discrimination; and (7) servicing abuses. Basically,
mortgage loans with a predatory nature utilize manipulation and misinformation in order to
generate the highest amount of revenue for the broker or lender.

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“The National Homeownership Strategy: Partners in the American Dream

http://www.globalurban.org/National_Homeownership_Strategy.pdf

Mentioned in that link, apparently removed from the govt website. However it appears someone saved it.

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The monthly costs associated with owning a home also remain an obstacle for many potential homebuyers. The most significant monthly housing cost for most new homeowners is the monthly mortgage cost. The mortgage loan factor that most dramatically affects long-term mortgage affordability is the interest rate charged to the borrower. When mortgage rates are high, many households are precluded, at least for a while, from the opportunity to own a home.

Low mortgage interest rates sustained over an extended period of time can have a compelling, beneficial impact on mortgage affordability and the rate of homeownership in America. Although interest costs are largely a function of external economic factors that cannot be controlled by

members of the partnership, to a lesser extent mortgage interest rates also are affected by factors such as the likelihood of mortgage prepayment by the homeowner, loan assumability by future homebuyers, mortgage insurance, loan risk, and other elements.

From the above link.

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http://www.nytimes.com/2008/10/19/business/19cisneros.html?pagewanted=all

As the Clinton administration’s top housing official in the mid-1990s, Mr. Cisneros loosened mortgage restrictions so first-time buyers could qualify for loans they could never get before.

Then, capitalizing on a housing expansion he helped unleash, he joined the boards of a major builder, KB Home, and the largest mortgage lender in the nation, Countrywide Financial — two companies that rode the housing boom, drawing criticism along the way for abusive business practices.

And Mr. Cisneros became a developer himself. The Lago Vista development here in his hometown once stood as a testament to his life’s work.

Joining with KB, he built 428 homes for low-income buyers in what was a neglected, industrial neighborhood. He often made the trip from downtown to ask residents if they were happy.

“People bought here because of Cisneros,” says Celia Morales, a Lago Vista resident. “There was a feeling of, ‘He’s got our back.’ ”

But Mr. Cisneros rarely comes around anymore. Lago Vista, like many communities born in the housing boom, is now under stress. Scores of homes have been foreclosed, including one in five over the last six years on the community’s longest street, Sunbend Falls, according to property records.

Staggering!

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http://lsr.nellco.org/uconn_wps/73/

Turning a Blind Eye: Wall Street Finance of Predatory Lending

Abstract

Today, Wall Street finances up to eighty percent of subprime home loans through securitization. The subprime sector, which is designed for borrowers with blemished credit, has been dogged by predatory lending charges, many of which have been substantiated. As subprime securitization has grown, so have charges that securitization turns a blind eye to financing abusive loans. In this paper, we examine why secondary market discipline has failed to halt the securitization of predatory loans.

When investors buy securities backed by predatory loans, they face a classic lemons problem in the form of credit risk, prepayment risk, and litigation risk. Securitization exacerbates all three risks by unbundling the mortgage process, giving rise to adverse selection. In theory, the lemons problem should cause investors to flee the market for subprime mortgage-backed securities or demand a risk premium commensurate with the worst quality loans. Instead, securitization allays adverse selection concerns by structuring transactions so that risk-averse investors receive their agreed-upon return without needing to screen out predatory loans. In addition to pricing, the secondary market uses structured finance and deal terms, instead of filtering, to manage credit, prepayment, and litigation risk. Furthermore, structured finance provides incentives to securitize predatory loans. Voluntary due diligence could help ameliorate the problem, but those efforts remain sparse. To alter this perverse incentive structure, we propose legislation to impose a duty on secondary market assignees of subprime home loans to investigate and police predatory lenders.

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http://www.wsj.com/articles/SB122883363239991387

WASHINGTON -- Executives at Fannie Mae and Freddie Mac clashed over the adequacy of risk controls for several years as the two giant mortgage companies increased their purchases of dicey loans, according to emails released Tuesday at a congressional hearing.

The emails show that the two government-backed mortgage companies were aware they were taking on more risk as the housing bubble peaked. But the companies pressed ahead with efforts to regain market share they had lost to Wall Street investment banks. They did so by buying loans and securities that increased their exposure to subprime mortgages, for people with weak credit records, and Alt-A mortgages, which typically spare borrowers from having to document their income and assets.

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http://www.nytimes.com/2008/10/05/business/05fannie.html?adxnnl=1&pagewanted=all&adxnnlx=1420387719-/bz73ufUOY1fJkUIGr/PCQ

Fannie, a government-sponsored company, had long helped Americans get cheaper home loans by serving as a powerful middleman, buying mortgages from lenders and banks and then holding or reselling them to Wall Street investors. This allowed banks to make even more loans — expanding the pool of homeowners and permitting Fannie to ring up handsome profits along the way.

But by the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.

For a time, that decision proved profitable. In the end, it nearly destroyed the company and threatened to drag down the housing market and the economy.

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I believe it goes back to the Clinton era and the political correct / diversity monster. Not enough poor people and especially those in black/ethnic communities were able to get a mortgage. It boiled down to lending people money they couldn't afford to pay back and the political need that any risk to the buyer be minimised. Good politics but unsound economics.

Talk too about the low upfront cost of such mortgages in the first few years.

I was under the impression that it started well before Clinton, in fact back in the days of Carter. The banks were put under pressure by the politicians to lend to people who couldn't afford the loan. Not, the banks were prssurised by the politicians, not that the banks thought it was a good idea.

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I was under the impression that it started well before Clinton, in fact back in the days of Carter. The banks were put under pressure by the politicians to lend to people who couldn't afford the loan. Not, the banks were prssurised by the politicians, not that the banks thought it was a good idea.

Was the S&Ls crisis the first time this blew up?

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I always thought this was the 'third way' politics , cheap debt , high LTV ratios and a gullible western public. Still believe its why the Chinese got the Olympics , in return for starting the wave of cheap goods as the western public was fed cheap credit.

Well this my theory.

D :-)

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