The Sub-Prime Mess for Dummies

This time, it really was different; unbridled greed pushed any sense out the door. Wealth was created but for the wrong people.

Von Hoffman:

As the subprime mortgage mess continues to play itself out, certain words that ought to pop up in the discussion are not to be heard. These are words like “fraud,” “conspiracy,” “misrepresentation” and “felony.”

We are looking at more than greed gone awry. We are looking at an industry that tolerated and fostered what the trade calls “ninja loans.” The Wall Street Journal defines a ninja loan as one that “required no income, no job, and no assets.” Anyone issuing a ninja knows damn well that there is a good chance that the home buyer will default. Nevertheless, the ninjas were sold to mortgage bankers who mixed them in with other mortgages, turned the package into bonds and sold them. If the bankers did not know that they were trading in worthless paper, their ignorance has to be willful, and that’s a crime.

Other subprime mortgages are called “no docs.” Such loans, according to The Journal, “didn’t require the lender to verify the borrower’s income.” Until 10 or so years ago it was absolutely impossible to obtain a no doc mortgage in the United States of America. The people and institutions issuing the loan and selling and/or reselling it demanded verification of the borrower’s ability to make the monthly payments. The only reason to issue a no doc loan is to deliberately choose not to know that the home buyer will more than likely not be able to carry the mortgage. Fraud again.

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Thanks to the puffed-up appraisals, mortgage brokers got large fees as they placed the fraudulent loans with bankers who got their cut as they passed the mortgages on to the next link in the chain. That the home purchasers did not have the income to keep their payments up to date was no problem since, with the assistance of the appraisers, the value of their property was going up all the time; they could make good on the payments by refinancing rotten mortgages with rotten-er mortgages. The yet-more-rotten instrument was the adjustable rate mortgage (ARM), which in and of itself, when ethically used, is a useful financial tool.

The whole thing was too rich for words. Not only did these people clean up with the original mortgage, but more fees and more thieving hanky-panky was there for the using when refinancing time came around. The refis were low-interest ARM’s that after two or more years would reset into high-interest ARM’s, unless of course the value of the property had risen again, thus making a second refi a profitable possibility.

Profitable is hardly the apt word. High on the hog does not describe it. Last year Angelo Mozilo, the founder and boss man of Countrywide Financial Corporation, took home $114 million in his pay envelope.

Apparently the crooked-business crowd thought that their squirrel-in-the-cage financing operation would go on forever. In the end, however, the rodent could no longer keep the cage revolving and collapsed exhausted. Finally, the government stepped in to stop the spinning cage but it was too late.

What was going on was no secret. Inside the housing and finance sectors, and outside of them, there were enough people who understood the essence of this racket. Talk, often intoxicated, greedy talk, about the real estate bubble abounded. We are not looking at another Enron, a case of the books having been cooked in such a manner that it was difficult to tell that this seemingly impressive corporation was in the death rattle phase.

This baby was out in the open for all to see if they wanted to. The politicians blindfolded themselves. The home ownership rate rose to more than 69 percent of households. For practical purposes anybody and everybody in the United States who wanted to own a home could. The people who hung back seem to have been limited to those too infirm to mow a lawn. So the construction industry hummed, furniture marched out of the stores alongside of the new appliances and the wheels of commerce turned so fast they blurred.

For some hundreds of thousands of lower-income minority home seekers the whole thing was a swindle and a bad enough swindle for the Federal Trade Commission to look into what happened. These people were told by real estate agents, appraisers, mortgage brokers and bankers that when they signed on ye olde dotted line they would be buying a house.

But they were not. Their no-down-payment mortgage with its trickery terms and the sneaky fees connected with consummating the deal left the would-be home buyers without any practical hope of building up equity in the property. In essence, under the guise of selling houses, the swindlers were renting to them. The people were renting but at the same time they were their own landlords, responsible for all expenses connected with the property. A more costly form of renting would be difficult to devise. Inasmuch as some of the fattest, most prestigious financial institutions have been partners in screwing those who can least afford it, let’s hope that, lured by the scent of large class action settlements, the lawyers will swoop in to exact a dollop or two of retribution and compensation.