The real victims of the foreclosure mess

While I feel the pain of those who have lost their homes to foreclosure, most of them have one thing in common; they either leveraged their home to the point of negative equity or took on a loan that adjusted to terms they knew they could not pay. Not all of them but most of them. They are not the true victims

As realtors we like to think we are the victims, but the reality is there are opportunities for those of us with the insight and motivation to get them. Quite honestly our ranks have grown too rapidly and it is good to thin out the herd.

The real victims are the investors who are holding mortgage backed investment products.

Here is a quick mortgage funding for dummies:

1) Broker brokers loan on behalf of a lender (broker has no money)

2) Lender either sells the loan to Fannie Freddie or investment bank (lender seldom is using their own money)

3) Investment bank now owns a product that pays out at about 6% return (the interest rate less the cost paid to the servicing company which is who you make your payments to ASC etc)

4) The investment is broken into small pieces that individual investors own (like a stock) think of it like investing in a mutual funds. Lots of pensions invested into these products as they were seen as safe investments. The same way you look at a company's financials to choose a stock you could look at the borrower and determine the risk. A paper, Alt A and subprime are risk measurements.

Here is how things got messy

1) Mortgage brokers "misrepresented" the quality of their buyer and or the value of the property. A paper is normally a high credit score, good financials full documentation and 80% LTV. If it does not meet this requirement it becomes Alt A which have slightly more risk. What the brokers and lenders did is no different than what Enron did they misrepresented the value of their company.

2) Appraisers gave values that hit "the number" we were looking for (this is where realtors shoulder their portion of the blame). I cant think of any agent who hasnt lobbied an appraiser for a better number. and there is the unwritten rule that if an appraiser does not hit the number the lender will go elsewhere.

3) Inflated property values, exaggerated quality of the buyer, and a declining market created the perfect storm.

Now is when the PMI company's and the investment banks look at every loan with a fine tooth comb and start telling the brokers "hey the guy who works the register at home depot does not make a 100k like you stated on the loan application so we are going to sell this loan back to you" Needless to say since brokers dont invest their own money they can not afford to have to buy a 300k mortgage.

Title insurance companies are also taking a hit. Everytime a bank has to foreclose they are looking for any title defect that will allow them to put in a title insurance claim and recoup some of their losses. Needless to say the title company then does an investigation to see if there is any fraud involved.

Let the blood bath begin