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Breaking Down The Latest Mortgage Mess

By
Real Estate Agent with Koa Realty Inc. RS - 59254

With the recent announcement that many banks are putting a freeze on new forclosures, there has been a lot of finger pointing.  The latest morsel of information to surface is that the large investment banks that were purchasing these mortgages (ie. Lehman Brothers, AIG and others)  from the mortgage banks (ie. Bank of America, Countrywide etc.) hired rating companies to go sift through these large pools of loans to determine how many of the loans conformed to the underwriting guidelines that were agreed upon when the mortgage banks approved the loans.  Anyone who has worked for a mortgage bank, as I have are saying to themselves... duh.. of course the investment banks had someone review the contents of the batch of loans that they were about to pay a billion dollars for.  The question is, what was disclosed about the contents of these loan pools to the final investor?

Let me first explain the way mortgage lending works.  The mortgage bank, let's say Countrywide for example, opens up an office down the street.  The first thing they need to do is find out what products they can offer the fine folks in their town.  These banks have a nice fat line of credit to lend out but they must immediately sell these loans, usually within 60 days after the loan closes to replenish their line of credit and lend that same money to your neighbor when he refinances.  These loans were sold to the large investment banks on wall street who sold them to the public through stock brokers and investment companies as mortgage backed securities.  The bank that funded your loan almost never kept it on their books unless they had to, due to the borrower not making their first mortgage payment or some other huge flaw in the loan.  These loans were known as "the rock pile".  As a Regional manager for a nationwide lender, one thing that I NEVER wanted to happen was to have one of my loans end up in the rock pile.  However, when we did make a mistake, the market was so hot and the Lehmans of the world were beating down our door for these loans, so, we usually ended up convincing them to take the rocks with the diamonds so to speak.

In a nutshell, Countrywide, and Lehman Bros. meet and agree upon the types of loans that Lehman and AIG will buy from Countrywide before the product is offered to the public.  By "type of loan"  I mean things like how large a down payment was required, how low the credit score can be and things like that. When these loans are bundled up they review them and disclose to the buyer the parameters that were supposedly followed.

The latest revelation is that the large investment banks (Lehman, AIG etc.) knew what they were buying (of course) and in many cases the loans were more aggressive, ie., lower credit scores, smaller down payments, more investment homes , but did not pass this information on the party that they sold to (you, your mutual fund etc.).  In reality, if they had disclosed this information it would not have mattered.  This was a FULL FLEDGED FEEDING FRENZY that would make a shark blush.  It doesn't make it right but they would have bought them anyway. I saw the appetite for these products grow until they were buying loans with no down payment, horrible credit and stated income!  These loans were usually fully disclosed and gobbled up by investment advisors and mutual fund managers around the world.

Finally... this is where even the hardiest stomach gets queasy.  It has been revealed that AIG was buying huge pools of these loans from the banks, not completely disclosing the aggressive nature of the loans contained therein when they sold them as mortgage backed securities and taking out policies on the sketchy loans they unloaded so that they would make huge profits when they failed.  Now, that stinks.

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Rich Bosselmann 

Real Estate Agent

richbosselmann@gmail.com

(808) 785-4664 

 

  

 

All content copyright by Richard Bosselmann.  All rights reserved.

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