Fraud, Lies, Cheating & Dishonesty In Housing "market".

[eric pebble]

I have thought hard about the perilous position the UK and other countries like the USA, Spain, France, Australia, NZ [etc.] are in: We are living in troubled times – brought on by greed, fraud, spin and dishonesty.

It all boils down to an overall logical explanation. Until the last decade or so, there was, by and large, a system in place which was fair – and transparent.

Essentially it was this: If you look at the graph at the top of this sites’ homepage – see attached BELOW - it tells you something very obvious. Since at least the late ‘forties onwards, the ordinary man [and woman] paid, roughly, up to a third of his/her monthly income to put a roof over his/her head. [For sake of convenience – will stick to “his” hereon!.] From roughly the 1930s to the early 1960s, I believe it was nearer 2.5 x salary.

There have been blips, yes – e.g. the late 80s is a good example – it went up to 4 or just over. But, the “ball-park” figure was that, certainly for bog standard accommodation, a third of your income per month or 3 x your annual salary – got you a roof. This figure didn’t come by accident. It came about by prudence and honesty.

As I have said for years on this site – and something which of course has been much discussed by many here ad infinitum, the old rule that you could borrow no more than 3 to 3.5 x your salary was a very sound and very logical one. I speak in general overall terms. Yes – loads of you bulls out there in particular will scream “no!” – But I stick by this resolutely: I firmly believe the reason we are in such a mess, certainly in the “Western” world, [but I suspect in Eastern Europe too], is that that golden rule has been broken. By sticking rigidly to this maximum mortgage borrowing level of 3 to 3.5 x multiple of annual income, it essentially meant that, generally speaking, to house themselves, people were paying around one third of their income to do so. That allowed them to lead dignified, honest and sensible lives in which they were able to save for the future and not go into debt.

And in the last 10 years or so in particular, there have been nothing buy lies, lies, lies – perpetrated by the Vested Interests – to pretend that it is OK to veer sharply away from the simple, stable and proved rule – borrow no more that 3 to 3.5 x salary. These lies have principally been the following:

“Inflation is 2-4% per anum”; House prices are not even included in the calculation of UK inflation. This is utterly corrupt.

“It’s OK to borrow 4, 5, 6, 7, 8, 9, 10, 11, 12+ x your salary, …“it’s different this time”; This is one of the biggest lies of all time.

I can see the bulls yelling – “it’s Ok, nothing wrong with that!” etc etc. It is a rule set in stone – try and pretend it isn’t – and we get what we have today – enslavement and disaster.

And for a decade now, essentially, the intentions and actions of the Vested Interests have been to divide the world in two – the “haves” and “have-nots”.

The “haves” are those who own property already; i.e. they have “got on the ladder”. The “have-nots” are those who are trying to fulfil a basic human need, i.e. put a roof over their heads. [Lets just forget the argument about renting/buying for now.] In order to do so, they must surrender their lives to their creditors.

The fact is, it nearly always has been, very hard to “buy” a house/flat to live in, but – and I firmly believe this – the Vested Interests have made it harder than ever before in history for the ordinary man to do this. Millions are on the edge of an abyss of foreclosure and repossession.

And this has been a deliberate act by those Vested Interests. Particularly in the UK, they have perpetrated the “message” that there is a “shortage” of property and land – so “you’d better buy now, or else”. There are many contentious issues around this point – how “shortage” is grossly exaggerated, how immigration is to blame, etc. These are important issues – but overall, the issue of a “shortage” of property, whether strictly true or not, has been used as a beating stick to panic buyers into buying into the “market” so that they don’t “miss out”.

And the result of all this is, that in the UK in particular, the average person is in the dreadful and appalling position of buckling under levels of personal debt the like of which have never been seen before. Further, levels of public, government borrowing are simply horrendous, and very dangerous for us all.

And “they”, the Vested Interests – i.e. Bankers, Lenders, the “property developers” and speculators and their agents - the Estate Agents, the PR and advertising agents, and many media organisations - have allowed and profited hugely from allowing this madness to occur unquestioned, quite cynically. Society has become horribly polarised as a result.

And this is the Key: It has all become a ruthless game; the rules have changed almost overnight. If you want to put a roof over your head/your family’s heads, you are now blackmailed with total ruthlessness by the VI s: You now have to pay at the very least 6 x your salary for a basic human need. And in actual fact, in many parts of the UK – and I presume, in many parts of the US until recently, it has become more like a 10 x multiple or more. This has never happened before. It is enslaving people to Lenders as if we have gone back to feudal times.

How has this happened?

The answer is quite simple: Through Lies, cheating and fraud. These all combine to form what I believe is an unprecedented level of overall dishonesty – a false world of pure make-believe – a world in which logic has gone out of the window and it is portrayed as “normal” by a corrupt publicity machine that “prices” go up and up and up forever. Actually, “prices” have been deliberately hyped up almost entirely artificially. And, whichever way you look at it, ultimately they are unsustainable.

Hence the presents crisis in World Stock Markets. The “Sub-Prime” defaults in the US are just the start of the toppling of a Massive Pyramid Scheme. Much the same is happening in places like Spain and will, without any doubt at all, happen here in the UK. It is already starting; repossessions are rising monthly. It is going to get much worse.

The Lies are prolific – but the essential ones here in the UK have been the lie that “inflation” is “2 or 3%”.

But one of the biggest lies of all is the one perpetrated by many parties – and it is the lie that people are now paying and “average of 3.3 x” their salary to pay for a roof for themselves. This lie is perpetrated by the Council of Mortgage Lenders [the CML], and this figure is used extensively by the Vested Interests – government, banks, the property media etc. It is a gross lie – and it is just too funny when people try and pretend it isn’t. And if it is the supposed figure of a JOINT mortgage of man and wife/partner, why don’t they say so CATEGORICALLY? Even still – if the average man and woman combine their income, they still cannot buy property today on a multiple of 3 x. We all know this – the VI’s and Bulls can try and say otherwise as much as they like – the average person in the UK knows they are lying.

Cheating:

There are all kinds of cheating all over the place. Examples include “cash-back” deals for buyers of new-build flats over much of the UK [uS too?]– where the “price” officially sent to and recorded by the Land Registry does not take into account of the “cash-back” figure. This is deliberately done so that “official figures” of sale prices are artificially high – so that the Vested Interests can point to them and say “house prices are rising” – when in fact they are declining. Numerous posters on this site have drawn attention to this. It is just one example of an insidious climate of overall dishonesty.

But of course the Biggest Lie, the Biggest Cheat, and the most Serious Dishonesty of all is Mortgage Fraud – the extent and level of which is endemic. This, above all else, has led to the unprecedented crisis in recent weeks on the world’s stock markets. In the US it’s called “Sub-Prime” – here in the UK it goes under various names, in particular “Self-Cert” - but they are all essentially the same thing – they are a variation of Mortgage Fraud.

When I watched the BBC Money Programme back in 2003 -- http://news.bbc.co.uk/1/hi/business/3222053.stm --- [Note: Click on "Watch & Listen, top right.]

and summarised here - http://www.bbc.co.uk/pressoffice/pressrele..._mortgage.shtml

-- I have to admit, my eyes were opened wide, and I wandered around in a daze for days. It struck me absolutely clearly then - and I have not wavered since - that the UK [and it turned out the US too, as well as, I suspect, Spain, Australia and NZ amongst others] was being systematically raped and pillaged by the Lenders and Vested Interests. Mortgage Fraud in its various forms was, and has been for years now, leading to untold misery – and ultimately catastrophe – to millions across the world. Who knows what lies ahead?

As many on this site know, my impassioned belief is that the revelations of Mortgage Frauds of various types and form across the globe, and the implications from the revealed facts of it, are of enormous – VAST – proportions to us all.

Essentially the clear and obvious implications are these:

Mortgage Fraud has led prices to be artificially inflated almost overnight – certainly in a matter of a few years or so right across the board. House “Prices” have risen 300 – 400% in less than a decade whilst for most wages have risen 10-15%, if that. Something has to give – and this is being manifested in Credit Failure around the world right now. Dishonesty and Fraud has been the root cause of this – of that there is no doubt.

Without any doubt at all, Mortgage Fraud is the main cause of House Price Inflation here in the UK, in the USA and possibly across the world. Yes, here in the UK we have a dreadful lack of control on immigration – and social services and infrastructure are straining to near-breaking point as a result. The lack of government concern and action on this is criminal.

Nevertheless, if you read the links I have posted above regarding Mortgage Fraud, and if you research further – [type “Mortgage Fraud” into Google – the US is awash with it, the UK is trying to pretend it isn’t] -- and then sit back quietly and think about what this gross dishonesty has done to inflate “prices” of property in each street, in each road, in each hamlet, village, town and city across the UK [and many other countries], you will hopefully understand what I believe to be the case. Lenders have effectively thrown vast swathes of money at everyone and anyone sothey can “buy” property. They have drenched the “market” with “money” – causing “price” inflation which they then try and pretend is normal.

And if you read much of what has been said not only on this site, but by many honest and sincere economists all over the world, particularly by the likes of The Economist, Moneyweek and many, many others – [see only today this - http://www.telegraph.co.uk/money/main.jhtm.../bcnswiss20.xml - ] you will hopefully get the overall message.

The message is this: New buyers are being forced, indeed blackmailed, to jump onto the bandwagon of the “housing market” – a “market” which in fact has turned into a vehicle that has been fatally hijacked and manipulated into a gigantic pyramid selling scam of unprecedented proportions. Housing has, far more than ever before and certainly for the last 10 years+, been used as a mere counter in a world-sized casino game. The unsuspecting buyer is merely a pawn – and is being sucked dry by the instigators of this scam. Pyramid schemes ultimately fail with catastrophic results.

The extent and level of this scam knows no bounds. In the good old days of mutual mortgage lenders – who took on the risk in their own books without selling them on into the ether [as “CDOs” etc], and with whom you took out a fair and transparent mortgage - those days seem like a distant memory. But they were times of fairness, straightforwardness, prudence and honesty – unlike the situation today. It is a world of dog eat dog. We are teetering on the edge of catastrophe.

Edited August 20, 2007 by eric pebble

[Lone_Twin]

A good post. Though I find your tone a little too inclined towards "rant" for my own taste.

Then again, perhaps its time we all got angry.

ST

[Guest Popalot]

It's a fantastic post. Less ranting, more lamenting the state of human nature.....which is getting more and more corrupt as the ages progress.

[stuckmojo]

very good post. Sums it all up!

[Guest DissipatedYouthIsValuable]

I have thought hard about the perilous position the UK and other countries like the USA, Spain, France, Australia, NZ [etc.] are in: We are living in troubled times – brought on by greed, fraud, spin and dishonesty.

It all boils down to an overall logical explanation. Until the last decade or so, there was, by and large, a system in place which was fair – and transparent.

Essentially it was this: If you look at the graph at the top of this sites’ homepage – see attached BELOW - it tells you something very obvious. Since at least the late ‘forties onwards, the ordinary man [and woman] paid, roughly, up to a third of his/her monthly income to put a roof over his/her head. [For sake of convenience – will stick to “his” hereon!.] From roughly the 1930s to the early 1960s, I believe it was nearer 2.5 x salary.

There have been blips, yes – e.g. the late 80s is a good example – it went up to 4 or just over. But, the “ball-park” figure was that, certainly for bog standard accommodation, a third of your income per month or 3 x your annual salary – got you a roof. This figure didn’t come by accident. It came about by prudence and honesty.

As I have said for years on this site – and something which of course has been much discussed by many here ad infinitum, the old rule that you could borrow no more than 3 to 3.5 x your salary was a very sound and very logical one. I speak in general overall terms. Yes – loads of you bulls out there in particular will scream “no!” – But I stick by this resolutely: I firmly believe the reason we are in such a mess, certainly in the “Western” world, [but I suspect in Eastern Europe too], is that that golden rule has been broken. By sticking rigidly to this maximum mortgage borrowing level of 3 to 3.5 x multiple of annual income, it essentially meant that, generally speaking, to house themselves, people were paying around one third of their income to do so. That allowed them to lead dignified, honest and sensible lives in which they were able to save for the future and not go into debt.

And in the last 10 years or so in particular, there have been nothing buy lies, lies, lies – perpetrated by the Vested Interests – to pretend that it is OK to veer sharply away from the simple, stable and proved rule – borrow no more that 3 to 3.5 x salary. These lies have principally been the following:

“Inflation is 2-4% per anum”; House prices are not even included in the calculation of UK inflation. This is utterly corrupt.

“It’s OK to borrow 4, 5, 6, 7, 8, 9, 10, 11, 12+ x your salary, …“it’s different this time”; This is one of the biggest lies of all time.

I can see the bulls yelling – “it’s Ok, nothing wrong with that!” etc etc. It is a rule set in stone – try and pretend it isn’t – and we get what we have today – enslavement and disaster.

And for a decade now, essentially, the intentions and actions of the Vested Interests have been to divide the world in two – the “haves” and “have-nots”.

The “haves” are those who own property already; i.e. they have “got on the ladder”. The “have-nots” are those who are trying to fulfil a basic human need, i.e. put a roof over their heads. [Lets just forget the argument about renting/buying for now.] In order to do so, they must surrender their lives to their creditors.

The fact is, it nearly always has been, very hard to “buy” a house/flat to live in, but – and I firmly believe this – the Vested Interests have made it harder than ever before in history for the ordinary man to do this. Millions are on the edge of an abyss of foreclosure and repossession.

And this has been a deliberate act by those Vested Interests. Particularly in the UK, they have perpetrated the “message” that there is a “shortage” of property and land – so “you’d better buy now, or else”. There are many contentious issues around this point – how “shortage” is grossly exaggerated, how immigration is to blame, etc. These are important issues – but overall, the issue of a “shortage” of property, whether strictly true or not, has been used as a beating stick to panic buyers into buying into the “market” so that they don’t “miss out”.

And the result of all this is, that in the UK in particular, the average person is in the dreadful and appalling position of buckling under levels of personal debt the like of which have never been seen before. Further, levels of public, government borrowing are simply horrendous, and very dangerous for us all.

And “they”, the Vested Interests – i.e. Bankers, Lenders, the “property developers” and speculators and their agents - the Estate Agents, the PR and advertising agents, and many media organisations - have allowed and profited hugely from allowing this madness to occur unquestioned, quite cynically. Society has become horribly polarised as a result.

And this is the Key: It has all become a ruthless game; the rules have changed almost overnight. If you want to put a roof over your head/your family’s heads, you are now blackmailed with total ruthlessness by the VI s: You now have to pay at the very least 6 x your salary for a basic human need. And in actual fact, in many parts of the UK – and I presume, in many parts of the US until recently, it has become more like a 10 x multiple or more. This has never happened before. It is enslaving people to Lenders as if we have gone back to feudal times.

How has this happened?

The answer is quite simple: Through Lies, cheating and fraud. These all combine to form what I believe is an unprecedented level of overall dishonesty – a false world of pure make-believe – a world in which logic has gone out of the window and it is portrayed as “normal” by a corrupt publicity machine that “prices” go up and up and up forever. Actually, “prices” have been deliberately hyped up almost entirely artificially. And, whichever way you look at it, ultimately they are unsustainable.

Hence the presents crisis in World Stock Markets. The “Sub-Prime” defaults in the US are just the start of the toppling of a Massive Pyramid Scheme. Much the same is happening in places like Spain and will, without any doubt at all, happen here in the UK. It is already starting; repossessions are rising monthly. It is going to get much worse.

The Lies are prolific – but the essential ones here in the UK have been the lie that “inflation” is “2 or 3%”.

But one of the biggest lies of all is the one perpetrated by many parties – and it is the lie that people are now paying and “average of 3.3 x” their salary to pay for a roof for themselves. This lie is perpetrated by the Council of Mortgage Lenders [the CML], and this figure is used extensively by the Vested Interests – government, banks, the property media etc. It is a gross lie – and it is just too funny when people try and pretend it isn’t. And if it is the supposed figure of a JOINT mortgage of man and wife/partner, why don’t they say so CATEGORICALLY? Even still – if the average man and woman combine their income, they still cannot buy property today on a multiple of 3 x. We all know this – the VI’s and Bulls can try and say otherwise as much as they like – the average person in the UK knows they are lying.

Cheating:

There are all kinds of cheating all over the place. Examples include “cash-back” deals for buyers of new-build flats over much of the UK [uS too?]– where the “price” officially sent to and recorded by the Land Registry does not take into account of the “cash-back” figure. This is deliberately done so that “official figures” of sale prices are artificially high – so that the Vested Interests can point to them and say “house prices are rising” – when in fact they are declining. Numerous posters on this site have drawn attention to this. It is just one example of an insidious climate of overall dishonesty.

But of course the Biggest Lie, the Biggest Cheat, and the most Serious Dishonesty of all is Mortgage Fraud – the extent and level of which is endemic. This, above all else, has led to the unprecedented crisis in recent weeks on the world’s stock markets. In the US it’s called “Sub-Prime” – here in the UK it goes under various names, in particular “Self-Cert” - but they are all essentially the same thing – they are a variation of Mortgage Fraud.

When I watched the BBC Money Programme back in 2003 -- http://news.bbc.co.uk/1/hi/business/3222053.stm --- [Note: Click on "Watch & Listen, top right.]

and summarised here - http://www.bbc.co.uk/pressoffice/pressrele..._mortgage.shtml

-- I have to admit, my eyes were opened wide, and I wandered around in a daze for days. It struck me absolutely clearly then - and I have not wavered since - that the UK [and it turned out the US too, as well as, I suspect, Spain, Australia and NZ amongst others] was being systematically raped and pillaged by the Lenders and Vested Interests. Mortgage Fraud in its various forms was, and has been for years now, leading to untold misery – and ultimately catastrophe – to millions across the world. Who knows what lies ahead?

As many on this site know, my impassioned belief is that the revelations of Mortgage Frauds of various types and form across the globe, and the implications from the revealed facts of it, are of enormous – VAST – proportions to us all.

Essentially the clear and obvious implications are these:

Mortgage Fraud has led prices to be artificially inflated almost overnight – certainly in a matter of a few years or so right across the board. House “Prices” have risen 300 – 400% in less than a decade whilst for most wages have risen 10-15%, if that. Something has to give – and this is being manifested in Credit Failure around the world right now. Dishonesty and Fraud has been the root cause of this – of that there is no doubt.

Without any doubt at all, Mortgage Fraud is the main cause of House Price Inflation here in the UK, in the USA and possibly across the world. Yes, here in the UK we have a dreadful lack of control on immigration – and social services and infrastructure are straining to near-breaking point as a result. The lack of government concern and action on this is criminal.

Nevertheless, if you read the links I have posted above regarding Mortgage Fraud, and if you research further – [type “Mortgage Fraud” into Google – the US is awash with it, the UK is trying to pretend it isn’t] -- and then sit back quietly and think about what this gross dishonesty has done to inflate “prices” of property in each street, in each road, in each hamlet, village, town and city across the UK [and many other countries], you will hopefully understand what I believe to be the case. Lenders have effectively thrown vast swathes of money at everyone and anyone sothey can “buy” property. They have drenched the “market” with “money” – causing “price” inflation which they then try and pretend is normal.

And if you read much of what has been said not only on this site, but by many honest and sincere economists all over the world, particularly by the likes of The Economist, Moneyweek and many, many others – [see only today this - http://www.telegraph.co.uk/money/main.jhtm.../bcnswiss20.xml - ] you will hopefully get the overall message.

The message is this: New buyers are being forced, indeed blackmailed, to jump onto the bandwagon of the “housing market” – a “market” which in fact has turned into a vehicle that has been fatally hijacked and manipulated into a gigantic pyramid selling scam of unprecedented proportions. Housing has, far more than ever before and certainly for the last 10 years+, been used as a mere counter in a world-sized casino game. The unsuspecting buyer is merely a pawn – and is being sucked dry by the instigators of this scam. Pyramid schemes ultimately fail with catastrophic results.

The extent and level of this scam knows no bounds. In the good old days of mutual mortgage lenders – who took on the risk in their own books without selling them on into the ether [as “CDOs” etc], and with whom you took out a fair and transparent mortgage - those days seem like a distant memory. But they were times of fairness, straightforwardness, prudence and honesty – unlike the situation today. It is a world of dog eat dog. We are teetering on the edge of catastrophe.

Hungry Ghosts. Tibetan Wheel of Life.

In the centre are the root causes of suffering.

Greed, fear/hatred and ignorance.

Rent to OM. (RTO)

It's the only way.

[Lone_Twin]

It's a fantastic post. Less ranting, more lamenting the state of human nature.....which is getting more and more corrupt as the ages progress.

I think the state of human nature has remained consistant.

.

There are however these days more ways for greed, selfishness etc.... to be manifested.

.

Humans will always strive to have "more" than each other and whether you are talking about Chief of the Village, Landed Gentry or BTL property speculators once you have capital/equity/power the easier it is to obtain more.

.

The market is the financial Karma which will correct the situation.

Unfortuantely it is weighted to "punish" the less intelligent more harshly.

.

ST

[lets get it right]

From my point of view - property has not gone up 300% to 400% in the last 10 years.

I bought a property in 1998 for £170k. Now, in the same condition as when I bought it (2 bed bungalow, nice size plot, good condition, 'little old lady' clean and tidy decor), it would fetch, at most, about £350k. So it has doubled. It actually doubled between 1998 and 2003 and has moved very little since (down in 2004/5 - back up in 2006).

I can't speak for the rest of the country. I know property up North has tripled (and more) - in some cases in just a few short years. But (from a Southern perspective) these were dirt cheap to start with - BTL properties in places like Liverpool, Wigan, Newcastle went from 30k to 100k largely as a result of Southern BTLetters looking up North for yields when yields in the South fell as prices rose. But this is just my take on a series of regional markets.

There is no such thing as 'the UK housing market' - London can be booming when Newcastle is falling and vice versa.

As far as the VIs are concerned. I'm not sure there is a conspiracy afoot to enslave everyone. Surely it is just competition. If you are in the business of lending you need to lend. If the bank next door is lending more than you, or cheaper than you, you have to compete or you don't get any business. So you take on more risk. Some lenders have taken much bigger risks than others. It's no different from any other business.

People (laughably) talk about introducing finance into the curriculum in schools. It will never happen. Imagine a generation leaving school understanding mortgages, risk, insurance, re-possession, credit card interest rates, the financial consequences of unemployment etc. The economy would collapse.

[visaria]

This 3x average earnings / house prices relationship sounds funny. I hear this sort of thinking all the time about the relationship between house prices and average earnings. Why should house prices be worth 3x the average salary? Is the person making an average salary buying a house? Should a car be priced as a multiple of the average salary (many people borrow to buy cars after all)?

How about a toothbrush?

[smash]

Fraud does capture quite alot of the activity that has caused rampant HPI but not all. I know several people who have enquired at their bank about obtaining a mortgage and the advisor has said to them: "the only way for you to buy is if we lend you 6 x your salary" - which i suppose is a true statement. No dishonesty or fraud has occurred when the 2 parties agree a mortgage contract on this basis but such lending practices are (like the fraud examples) driving up prices. What is required therefore is greater regulation for the finanical services industry. Also the investment fad of BTL has to be considered, but yes that is going to be rife with all types of fraud for sure.

[dokken]

good post,has made me re-think my "lunatic" friend in the offices ranting about the new world order etc...

Perhaps the manipluation of these markets is pre-planned? after all the super-rich care about real physical assets ,not nominal cash.If assets become cheaper and your a buyer its all good news...

Is this a big conspiracy to get us all into debt for life?

(ps i just went STR last week )

[goonboy]

It's the only way.

It it but human nature to quote the OPs lengthy post in a reply.

Annoyance is the flip side of forgiveness...

Peace

P.S. But, I thought desire was suffering?

[eric pebble]

It it but human nature to quote the OPs lengthy post in a reply.

Annoyance is the flip side of forgiveness...

Peace

P.S. But, I thought desire was suffering?

This guy - a good example of the honest, non-VI journalist -- a rare species these days....

Link here - http://www.bbc.co.uk/blogs/thereporters/ro...iars_loans.html

Liars’ Loans

Robert Peston 20 Aug 07, 08:00 AM

The underlying cause of the current global financial crisis is a system in which there’s little personal responsibility for lending decisions.

Here’s how it all works (or, as we now see, how it doesn’t work).

In the US, some half a million mortgage brokers have been incentivised to “sell” mortgages to potential homebuyers.

They don’t work for the providers of the loans. They are paid commissions for the volume of mortgages they arrange. So, of course, they try to arrange as many mortgages as they can, not minding the consequences.

If the customer wants to borrow more than he or she can really afford, then that’s no problem, thanks to a wonderful innovation called “stated income, stated assets” loans.

These allow US homebuyers to give a personal undertaking that their income is a certain level, even if they don’t provide any proof.

Such loans have been taken out by hundreds of thousands of US citizens who are pay-as-you-earn tax-payers and could therefore have easily provided proof of earnings, had they wanted to do so.

Surprise, surprise: studies have shown “discrepancies” between what such borrowers say they earn and what they actually earn, in 95 per cent of these loans.

These mortgages are now colloquially known as “liars’ loans”.

But liars’ loans are just the extreme manifestation of a US system for generating home loans which is predicated on turning a blind eye to economic reality.

When a borrower has difficulty making repayments on a loan, a mortgage broker would typically encourage them to pay off that loan by taking out a new one for an even greater amount! These are the infamous “rolling loans” which “gather no losses”.

When a loan is rolled over, no one need know that defaults loom – at least not for a while.

Wall Street’s Sausage Machine

What happens to all these hundreds of billions of dollars in home loans?

Well the paperwork and administration is usually done by specialist home loans companies, such as New Century Financial (which went into bankruptcy protection in the spring).

Then the debt itself goes into a giant mincing and mixing machine on Wall Street operated by the biggest US investment banks, led by Goldman Sachs, Morgan Stanley, Merrill Lynch and the like.

They take all this debt and they process it into asset-backed securities, or bonds.

Note that Goldman, Morgan et al have NO CONNECTION with the borrowers and NO IDEA whether an individual borrower is a good risk or a bad risk.

But they have historic data on default rates.

And this data allows them – or so they claim – to assess whether a bond is a good risk or a poor risk, and therefore to price it for consumption by international investors.

What’s more, verification of the riskiness of a bond is provided, for a fee, by the specialist credit-rating agencies, led by Moody’s and Standard & Poor’s (let’s for now ignore the obvious conflict-of-interest that as the market for these bonds expands, the rating agencies make bigger profits).

There’s a conspicuous problem here. An important part of the US home loans market, the sub-prime mortgages provided to those with poor credit histories, is a young market which has grown like topsy.

Or to put it another way, data gathered from past performance of loans in a small market may not be much of a guide to the future performance of a trillion dollar plus market.

But that hasn’t stopped the big investment banks citing this questionable data to convert sub-prime loans into bonds that they claim are risk-free and which have a so-called triple-A credit rating.

Here’s how they do the clever engineering.

For argument's sake, let’s say that they estimate that as many as one in two home loans will default and that on average there will be a 40 per cent loss on those defaulting loans. That, in turn, gives a maximum risk of 20 per cent losses on a portfolio of these loans.

Bad news? Not for creative investment bankers. Out of this portfolio of low-quality loans, they can create supposedly high quality bonds by putting in place covenants which stipulate that the first 20 per cent of losses would be attributed to one bunch of really poisonous bonds, usually called toxic waste, leaving the rest of the bonds almost as safe as US Treasury bonds (in theory).

Before we move on, it’s probably worth recapping the phoney assumptions made by the investment banks as they create these bonds:

1) That historic data on default rates is useful even though the market has exploded in size

2) That data of any sort is useful even though the system for originating the loans, with mortgage brokers paid by the volume of loans they make, actually encourages fraud.

So far, so disturbing. But it gets worse.

Because the demand for toxic waste isn’t as huge as all that (some purchasers of this poison have suffered horrendous losses), investment banks have looked for ways to slice and dice the toxic waste, to create something almost edible.

They’ve mixed it up with other securities in collateralised debt obligations, which are bonds created out of other bonds – or sometimes they are bonds created out of bonds, that are in turn created out of other bonds (collateralised debt obligations squared, as if you wanted to know).

Even these bonds made of bonds rely to a worrying extent on all that dodgy historic data to determine their risk of default – the credit risk – or the risk that they’ll be vulnerable to interest-rate changes.

But notice too that once the original sub-prime loan is in a collateralised debt obligation, that loan could be one of perhaps a million different loans all mashed together to form this new bond.

What that means is that the eventual purchaser of the collateralised debt obligation has no more idea what’s in that bond than a sap eating a Turkey Twizzler knows what he or she is eating. Little wonder that when there’s a global scare about what may actually be in these bonds, no one wants to touch them.

That said, the investment banker will argue, on the basis of portfolio theory, if you put one load of toxic waste with another seemingly independent load of toxic waste, then the risk of holding them will fall. But for that to be true, each bunch of toxic waste would have to be uncorrelated to the other bunch – and that ain’t necessarily so.

Here’s the bottom line: for the past few years, Wall Street has operated a giant machine for turning mind-boggling amounts of US home loans – which are hugely vulnerable to losses from fraud and the inescapable cycles in interest rates and housing prices – into supposedly risk-free investments for risk-averse investors in Asia, the Middle East and (as it turns out) for Europe’s big banks.

Now if I worked for Goldman Sachs, Morgan Stanley, Merrill Lynch or the other big US investment banks, I might be considering my career options at the moment. It is inconceivable that they will escape unscathed from this debacle. Whatever the financial cost to these banks, which will not be trivial, there will also be significant damage to their reputations.

Europe’s Shame

But Europe’s banks are hardly blameless either. If the underlying cause of the global financial crisis is fraud and greed in the US home loans system – from mortgage broker to investment bank – the trigger of the crisis was chronic folly by big international lending banks, notably some in Europe.

I am talking about banks’ use of “conduits” and “structured investment vehicles” (SIVs).

These are special off-balance sheet companies set up by banks for borrowing cheap short-term funds from the money markets in the form of securities known as asset-backed commercial paper.

Now, as their name implies, the commercial paper is secured against asset-backed securities, such as mortgage-backed securities and collateralised debt obligations. According to Citigroup, European conduits held more than $500bn of assets to back commercial paper at the end of March.

But there’s an intrinsic weakness to this funding: commercial paper of short duration has been sold by banks to finance their purchases of long-dated bonds whose assets include those dodgy sub-prime loans to US homeowners.

It’s a classic liquidity mismatch, except when there’s a reliable, active market for such bonds. To reiterate, European banks have been borrowing money that has to be repaid or rolled-over every 90 days to fund their ownership – direct or indirect – of 30-year US home loans.

They did this because they received more from the holdings of asset-backed bonds and collateralised debt obligations than they paid out in interest on the commercial paper. In theory, they made an attractive return.

Here’s the Catch 22: such funding schemes only work while the market has confidence in the value of the collateral backing the commercial paper.

When investors start to have qualms about asset-backed bonds and collateralised debt obligations, banks are squeezed in a vice: short-term funding disappears and there is a collapse in the value of the assets they hold.

So what happened over the past fortnight was a highly predictable – except by the big banks – double whammy.

Lenders to banks refused to repurchase commercial paper when it matured. And the banks that issued that paper faced a funding crisis, because they were unable to sell the collateral or raise new money against it.

Everyone had suddenly woken up to the idea that this allegedly safe collateral of mortgage-backed securities and collateralised debt obligations was the equivalent of a palace built on paper foundations.

That inability of major banks to raise short term finance is why the European Central Bank – and the US Federal Reserve and other central banks – recently pumped tens of billions of pounds of additional liquidity into the banking market at interest rates well below the new market rates (that had risen sharply).

This was subsidised lending by the ECB and the Fed. They have been bailing out silly behaviour by banks that should have known better. State-insured banks had no business engaging in such short-sighted financial engineering, which is a million miles from their core banking operations on behalf of Europe’s consumers and companies.

There is – contra the Economist – a serious moral hazard problem here. The Bank of England, by contrast, would only lend emergency funds to banks at a punitive interest rate, which seems a more prudent way to be the lender of last resort.

What horrors await

On Friday, in an attempt to shore up the US housing market, and by extension the value of all those crappy mortgage-backed bonds, the Fed signalled that interest rates would come down for all of us sooner rather than later.

But that’s to treat the symptoms rather than the disease itself. To avoid a repeat of this kind of crisis, there needs to be a return to lenders taking some responsibility for the loans they make.

Most bankers now think it’s quaint and absurd that once-upon-a time a bank manager actually managed a loan book and even talked to the individuals to whom he or she lent.

Our brave new world – in which a Parisian or Frankfurt bank doesn’t even know whether it’s exposed to the US housing market through its Turkey Twizzler collateralised debt obligations – is neither healthy or sustainable.

Oh!! FABULOUS Stuff!!!!! Give this guy a medal!!!!!!

Edited August 20, 2007 by eric pebble

[Lone_Twin]

That is some nice work.

.

ST

[vfr]

excellent post

[pootle]

Good post Eric!

[Solvent Celt]

When I watched the BBC Money Programme back in 2003 -- http://news.bbc.co.uk/1/hi/business/3222053.stm --- [Note: Click on "Watch & Listen, top right.]

and summarised here - http://www.bbc.co.uk/pressoffice/pressrele..._mortgage.shtml

-- I have to admit, my eyes were opened wide, and I wandered around in a daze for days. It struck me absolutely clearly then - and I have not wavered since - that the UK [and it turned out the US too, as well as, I suspect, Spain, Australia and NZ amongst others] was being systematically raped and pillaged by the Lenders and Vested Interests.

Nice piece Eric.

As your BBC clip shows 9 out of 10 mortgage brokers recomended fraud as the only way the buyer could buy a property.

What are the chances that the one honest advisor lost his job for failing to meet sales targets?

What are the chances that prospective purchasers went from his office to another one where they were advised to "lie to buy"?

In many areas of the country the level of fraud in new mortgages must be close to 100%.

If people can be convinced "everybody is doing it" then morality goes out the window. Those who maintain their intergrity are punished by the system.

This fraud has massively skewed the UK economy - those responsible should be shot.

7-10 years for mortgage fraud. Any chance of any prosecutions? I won't hold my breath.

Edited August 20, 2007 by Solvent Celt

[bearbullfence]

I have thought hard about the perilous position the UK and other countries like the USA, Spain, France, Australia, NZ [etc.] are in: We are living in troubled times – brought on by greed, fraud, spin and dishonesty.

It all boils down to an overall logical explanation. Until the last decade or so, there was, by and large, a system in place which was fair – and transparent.

Essentially it was this: If you look at the graph at the top of this sites’ homepage – see attached BELOW - it tells you something very obvious. Since at least the late ‘forties onwards, the ordinary man [and woman] paid, roughly, up to a third of his/her monthly income to put a roof over his/her head. [For sake of convenience – will stick to “his” hereon!.] From roughly the 1930s to the early 1960s, I believe it was nearer 2.5 x salary.

Define troubled - please cite evidence.

No way to tell that from graph. Where is income on graph? How is this fair and transparent? Why is 2.5 fair and 1.5 not fair, or 10.5 for that matter? Why should anyone but a select few own a house? Why shouldn't all land be publically owned and all structures used by anyone at anytime?

There have been blips, yes – e.g. the late 80s is a good example – it went up to 4 or just over. But, the “ball-park” figure was that, certainly for bog standard accommodation, a third of your income per month or 3 x your annual salary – got you a roof. This figure didn’t come by accident. It came about by prudence and honesty.

As I have said for years on this site – and something which of course has been much discussed by many here ad infinitum, the old rule that you could borrow no more than 3 to 3.5 x your salary was a very sound and very logical one. I speak in general overall terms. Yes – loads of you bulls out there in particular will scream “no!” – But I stick by this resolutely: I firmly believe the reason we are in such a mess, certainly in the “Western” world, [but I suspect in Eastern Europe too], is that that golden rule has been broken. By sticking rigidly to this maximum mortgage borrowing level of 3 to 3.5 x multiple of annual income, it essentially meant that, generally speaking, to house themselves, people were paying around one third of their income to do so. That allowed them to lead dignified, honest and sensible lives in which they were able to save for the future and not go into debt.

Please explain the relationship where prudence and honesty impacts the multiple of salary for property. Why do you think that multiple was agreed upon in the past?

Define dignified, how are we not dignified now? Same for sensible. Why should people not go into debt. Why shouldn't we have a system whereby the state pays for everything once you've retired?

And in the last 10 years or so in particular, there have been nothing buy lies, lies, lies – perpetrated by the Vested Interests – to pretend that it is OK to veer sharply away from the simple, stable and proved rule – borrow no more that 3 to 3.5 x salary. These lies have principally been the following:

“Inflation is 2-4% per anum”; House prices are not even included in the calculation of UK inflation. This is utterly corrupt.

“It’s OK to borrow 4, 5, 6, 7, 8, 9, 10, 11, 12+ x your salary, …“it’s different this time”; This is one of the biggest lies of all time.

I can see the bulls yelling – “it’s Ok, nothing wrong with that!” etc etc. It is a rule set in stone – try and pretend it isn’t – and we get what we have today – enslavement and disaster.

And for a decade now, essentially, the intentions and actions of the Vested Interests have been to divide the world in two – the “haves” and “have-nots”.

Please provide proof this is the case.

I would think one of the biggest lies of all time has the initial JC. But we won't go into that.

Who is enslaved - please provide evidence. Is amnesty international aware? Please cite evidence for disaster.

No haves and have-not devide before 1997. Fantastic news. Could you let the history books know so they can rewrite them.

The “haves” are those who own property already; i.e. they have “got on the ladder”. The “have-nots” are those who are trying to fulfil a basic human need, i.e. put a roof over their heads. [Lets just forget the argument about renting/buying for now.] In order to do so, they must surrender their lives to their creditors.

The fact is, it nearly always has been, very hard to “buy” a house/flat to live in, but – and I firmly believe this – the Vested Interests have made it harder than ever before in history for the ordinary man to do this. Millions are on the edge of an abyss of foreclosure and repossession.

And this has been a deliberate act by those Vested Interests. Particularly in the UK, they have perpetrated the “message” that there is a “shortage” of property and land – so “you’d better buy now, or else”. There are many contentious issues around this point – how “shortage” is grossly exaggerated, how immigration is to blame, etc. These are important issues – but overall, the issue of a “shortage” of property, whether strictly true or not, has been used as a beating stick to panic buyers into buying into the “market” so that they don’t “miss out”.

And the result of all this is, that in the UK in particular, the average person is in the dreadful and appalling position of buckling under levels of personal debt the like of which have never been seen before. Further, levels of public, government borrowing are simply horrendous, and very dangerous for us all.

Why forget rules about renting? Oh cos then your rant falls apart at the seams maybe?

Please quote volume of housing transaction over last 50 years to prove it is getting harder. Please cite evidence of the millions looking at an abyss.

Cite, cite, cite. Please prove that there is ample land.

Why are levels dangerous?

And “they”, the Vested Interests – i.e. Bankers, Lenders, the “property developers” and speculators and their agents - the Estate Agents, the PR and advertising agents, and many media organisations - have allowed and profited hugely from allowing this madness to occur unquestioned, quite cynically. Society has become horribly polarised as a result.

And this is the Key: It has all become a ruthless game; the rules have changed almost overnight. If you want to put a roof over your head/your family’s heads, you are now blackmailed with total ruthlessness by the VI s: You now have to pay at the very least 6 x your salary for a basic human need. And in actual fact, in many parts of the UK – and I presume, in many parts of the US until recently, it has become more like a 10 x multiple or more. This has never happened before. It is enslaving people to Lenders as if we have gone back to feudal times.

Define horribly. Please cite evidence of polarisation.

Just shocking. I would be inclined to believe you if you are able to cite some evidence. BTW, you forgot about renting.

How has this happened?

The answer is quite simple: Through Lies, cheating and fraud. These all combine to form what I believe is an unprecedented level of overall dishonesty – a false world of pure make-believe – a world in which logic has gone out of the window and it is portrayed as “normal” by a corrupt publicity machine that “prices” go up and up and up forever. Actually, “prices” have been deliberately hyped up almost entirely artificially. And, whichever way you look at it, ultimately they are unsustainable.

Hence the presents crisis in World Stock Markets. The “Sub-Prime” defaults in the US are just the start of the toppling of a Massive Pyramid Scheme. Much the same is happening in places like Spain and will, without any doubt at all, happen here in the UK. It is already starting; repossessions are rising monthly. It is going to get much worse.

The Lies are prolific – but the essential ones here in the UK have been the lie that “inflation” is “2 or 3%”.

Cite evidence of cheating and fraud. Please forward to the relevant authorities. What evidence do you have to suggest unsustainability?

How do you know, where is the evidence. What crisis in stock markets? There has been a correction. Where is the crisis. Please tell me why this is a crisis instead of a correction, cite evidence to back up your theory.

Cite evidence this is a lie. The national news will be waiting to hear from you.

But one of the biggest lies of all is the one perpetrated by many parties – and it is the lie that people are now paying and “average of 3.3 x” their salary to pay for a roof for themselves. This lie is perpetrated by the Council of Mortgage Lenders [the CML], and this figure is used extensively by the Vested Interests – government, banks, the property media etc. It is a gross lie – and it is just too funny when people try and pretend it isn’t. And if it is the supposed figure of a JOINT mortgage of man and wife/partner, why don’t they say so CATEGORICALLY? Even still – if the average man and woman combine their income, they still cannot buy property today on a multiple of 3 x. We all know this – the VI’s and Bulls can try and say otherwise as much as they like – the average person in the UK knows they are lying.

Prove it. My mortgage is 2.7x my salary.

Cheating:

There are all kinds of cheating all over the place. Examples include “cash-back” deals for buyers of new-build flats over much of the UK [uS too?]– where the “price” officially sent to and recorded by the Land Registry does not take into account of the “cash-back” figure. This is deliberately done so that “official figures” of sale prices are artificially high – so that the Vested Interests can point to them and say “house prices are rising” – when in fact they are declining. Numerous posters on this site have drawn attention to this. It is just one example of an insidious climate of overall dishonesty.

Posters have said it's happening. Well I'm conviced. Hard evidence please. Land registry would be interested to know thay are being given false data.

But of course the Biggest Lie, the Biggest Cheat, and the most Serious Dishonesty of all is Mortgage Fraud – the extent and level of which is endemic. This, above all else, has led to the unprecedented crisis in recent weeks on the world’s stock markets. In the US it’s called “Sub-Prime” – here in the UK it goes under various names, in particular “Self-Cert” - but they are all essentially the same thing – they are a variation of Mortgage Fraud.

When I watched the BBC Money Programme back in 2003 -- http://news.bbc.co.uk/1/hi/business/3222053.stm --- [Note: Click on "Watch & Listen, top right.]

and summarised here - http://www.bbc.co.uk/pressoffice/pressrele..._mortgage.shtml

-- I have to admit, my eyes were opened wide, and I wandered around in a daze for days. It struck me absolutely clearly then - and I have not wavered since - that the UK [and it turned out the US too, as well as, I suspect, Spain, Australia and NZ amongst others] was being systematically raped and pillaged by the Lenders and Vested Interests. Mortgage Fraud in its various forms was, and has been for years now, leading to untold misery – and ultimately catastrophe – to millions across the world. Who knows what lies ahead?

As many on this site know, my impassioned belief is that the revelations of Mortgage Frauds of various types and form across the globe, and the implications from the revealed facts of it, are of enormous – VAST – proportions to us all.

Essentially the clear and obvious implications are these:

Mortgage Fraud has led prices to be artificially inflated almost overnight – certainly in a matter of a few years or so right across the board. House “Prices” have risen 300 – 400% in less than a decade whilst for most wages have risen 10-15%, if that. Something has to give – and this is being manifested in Credit Failure around the world right now. Dishonesty and Fraud has been the root cause of this – of that there is no doubt.

Why do you dismiss the fact that this "mortgage fraud" has enabled millions of poeple to put a roof over their head. Something you say is a basic human need.

Please cite evidence of house price increase in less than a decade, please cite evidce of wages. (FYI, my wage has increase 130% since 2001, my house has increased 150%)

Without any doubt at all, Mortgage Fraud is the main cause of House Price Inflation here in the UK, in the USA and possibly across the world. Yes, here in the UK we have a dreadful lack of control on immigration – and social services and infrastructure are straining to near-breaking point as a result. The lack of government concern and action on this is criminal.

Please proof that 1) services are at breaking point, 2)immigration is the cause. Ironic thing is, without immigration reducing wage inflation HPI may be even higher.

Edited August 20, 2007 by bearbullfence

[Lone_Twin]

bearbullfence - I think we would probably disagree on a few points but your post is a timely reminder to always check for the evidence. Its easy to call all the btls OOs MEWers etc.. out there "sheeple" but when things start to sound like what we want to hear its easy to take things without question.

.

Thanks.

.

ST

[eric pebble]

Define troubled - please cite evidence.

Please proof that 1) services are at breaking point, 2)immigration is the cause. Ironic thing is, without immigration reducing wage inflation HPI may be even higher.

You know what bearbullfence......... I just don't think I can be bothered right now. I think quite a few people reading your post may be reminded of that guy at school/work/parties who loves to pick a fight just for the sake of it ..........

So if someone dropped the line - "The sky is really blue today" -- you would go up to them, fist clenched, threatening manner -

"How do you know the sky isn't red - define blue - prove to me it isn't pink?; I'll smash your little face in if you can't........" etc.

Edited August 20, 2007 by eric pebble

[eric pebble]

Nice piece Eric.

As your BBC clip shows 9 out of 10 mortgage brokers recomended fraud as the only way the buyer could buy a property.

What are the chances that the one honest advisor lost his job for failing to meet sales targets?

What are the chances that prospective purchasers went from his office to another one where they were advised to "lie to buy"?

In many areas of the country the level of fraud in new mortgages must be close to 100%.

If people can be convinced "everybody is doing it" then morality goes out the window. Those who maintain their intergrity are punished by the system.

This fraud has massively skewed the UK economy - those responsible should be shot.

7-10 years for mortgage fraud. Any chance of any prosecutions? I won't hold my breath.

Thanks Sovent Celt ---

It is really weird how nothing seems to be done here in the UK - it's spooky!

And - YES -- that BBC documentary was breathtaking -- EVEYONE should look at those links!!!! Incredible to watch that short video too -- the WHOLE programme was like that - EVERY EA and MORTGAGE BROKER was dishonest!!!

I love your graphics! How do you do them?

Edited August 20, 2007 by eric pebble

[Guest Winnie]

You know what bearbullfence......... I just don't think I can be bothered right now. I think quite a few people reading your post may be reminded of that guy at school/work/parties who loves to pick a fight just for the sake of it ..........

So if someone dropped the line - "The sky is really blue today" -- you would go up to them, fist clenched, threatening manner -

"How do you know the sky isn't red - define blue - prove to me it isn't pink?; I'll smash your little face in if you can't........" etc.

I'd add to that. whenever I see your name bearbullfence, I think of a nasty white paling catching you right between the goolies. Ouch....so well deserved.

[Guest Bart of Darkness]

As your BBC clip shows 9 out of 10 mortgage brokers recomended fraud as the only way the buyer could buy a property.

And that was in 2003!

So if someone dropped the line - "The sky is really blue today" -- you would go up to them, fist clenched, threatening manner -

"How do you know the sky isn't red - define blue - prove to me it isn't pink?; I'll smash your little face in if you can't........" etc.

<pendant>Please define red and blue in exact frequencies (nanometers preferably but Ångström units will suffice).

Please define "threatening". Please provide evidence that the person concerned felt threatened.</pendant>

[huw]

This 3x average earnings / house prices relationship sounds funny. I hear this sort of thinking all the time about the relationship between house prices and average earnings. Why should house prices be worth 3x the average salary?

The 3x ratio is not prescriptive; it emerges from what used to be considered to be prudent levels of lending/borrowing. Lenders and borrowers have ignored this old-fashioned prudence and bid property prices up beyond reason; we now seem to be on the brink of payback. If the doom-sayers are proved wrong and all turns out to be well, then perhaps the 3x idea will be discredited, but it ain't happened yet.

[eric pebble]

The 3x ratio is not prescriptive; it emerges from what used to be considered to be prudent levels of lending/borrowing. Lenders and borrowers have ignored this old-fashioned prudence and bid property prices up beyond reason; we now seem to be on the brink of payback. If the doom-sayers are proved wrong and all turns out to be well, then perhaps the 3x idea will be discredited, but it ain't happened yet.

Many people will be thinking - 3 x or 3.5 x salary is just PURE LOGIC. If it were adhered to rigidly - wouldn't the world be a much better place - house values would not be subjected to wild girations and absurd fluctuations - all essentially the result of them being used purely for speculation - something they should not be used for. Houses are for living in - not for gambling with. = like counters in the casino.

Edited August 20, 2007 by eric pebble

[Solvent Celt]

Thanks Sovent Celt ---

It is really weird how nothing seems to be done here in the UK - it's spooky!

And - YES -- that BBC documentary was breathtaking -- EVEYONE should look at those links!!!! Incredible to watch that short video too -- the WHOLE programme was like that - EVERY EA and MORTGAGE BROKER was dishonest!!!

I love your graphics! How do you do them?

The only conclusion I can come to is that the powers that be do nothing because it suits them. It's politically expedient to keep the bubble going because as long as the music continues every thing is ok. It's only when the music stops people realise that all the chairs have been taken away.

I think the political system means that the current government only thinks as far forward as the next election.

Cheers! I do them in photoshop though I am trying to get to grips with illustrator as well.