Friday, August 04, 2006

Mortgage Market Meltdown

Lets look at an organization named Fannie Mae. Picture it as a 4 x 4 x 4 foot black box with the words Fanny Mae printed in white on it. Envision Mr. or Ms. "Mortgage Market" dropping into the box all of their 80% finance loans and when the box gets to $1 million it spits out an investment certificate for 1 million paying 5%, face amount guaranteed, which is purchased by Mr. or Ms. "Unknown Entity," AKA "mark" or "sucker."

The little black box is a great transformer and redistributer of debt. Nobody wanted to touch that crap until they built the little black box. By God everyone is entitled to the American dream of home ownership rah! rah! rah!

So we have this box and the question arises, "What the hell do they do inside that box?" My guess--absolutely nothing.

There is really no problem with the design model aspect of the black box. It will perform within its parameters. After all its rather absurd to have a market drop 20% isn't it? (Believe that, and I have a bridge to sell you). What is not realized is that the market can drop 50 to 70 percent. In this scenario, the little black box fails to function as expected. It doesn't have the funds necessary to back the claims it made in the past. What funds does it have for back up of bad loans? My guess, is none. Say you need one or two trillion dollars to back up the investors who bought these certificates---total tax collections for the US of A is about 1 trillion a year. Sounds like someone is going to get short sheeted!

The question arises who's holding all of the crap and who is going to get burned?

My guess is mutual funds and IRA's and I could be wrong.


Anonymous said...

As a mortgage professional I can tell you, the banks and wall Street money brokers out there are so greedy to make loans they are lending to anyone. Borrowers I couldn't get financed 5 years ago I can now get a zero down no income verification loan. And all the zero down investor loans I'm doing! Many of these small time investors haven't a clue what they are getting into. But the banks are glad to lend the money.

Jim in San Marcos said...

I agree with you. Thats the real odd thing about this whole mess. There is a lot of money out there ready to be loaned out to anyone that can fog a mirror.

Interest rates are on the low side. The supply of houses for sale is about to go ballistic.

I just can't figure out who wants to hold a 30 year note paying 5% that has a good chance of default.

The bank can make a good percentage managing the contract. But I don't see them holding the paper. The S&L disaster of the 90's would keep them from making that mistake twice.

Who's holding the bag???

John Doe said...

Can you say fractional lending?

If reserves are required to be 10%, and I have 100K in deposits, I can lend out $1M. When reserves are required to be 5%, I can lend out $2M. Our money supply is out of control!

Anonymous said...

Good analogy, but it can be improved. First, FannieMae is mostly an entity which is enforcing standards so that the loans are all "conforming". Confroming to what? To some arbitrary rules. Second, it is not FannieMae but some investment banks on Wall Street, all starting with Goldman Sachs in the 1980s (or 70s?) when the mortgages were arranged into pools and then the pools were used as the assets backing "Mortgage Backed Securities". Well, the standards for loan approval, documentation and the total separation of the multiple industries who make money on the process and the investor funding the whole fraud helped make this problem huge, and the prime by product to it all is the housing bubble. The bubble is just about to burst, hasn't really started yet. The reason so many hedge funds and financial institutions are in trouble is that the MBS securities themselves were arranged into packages, and then sliced into separate parts. Why? Each piece was too complex for the buyers to understand, so the seller could say anything and sell the pieces at prices much higher then they were worth. Incompetence, greed, fraud. Plus corruption and/or incompetence and lazyness on the part of the regulators, the SEC, the banking industry. Numerous smart players knew this was happening, and knew the financial mess would collapse. They made money at every step of the process. Next, you will see them, and their affiliates, make tons of money as the failing institutions are raped by powerful players with their conflicted counsel in the federal bankruptcy courts. Sure, the American public will feel pain. But the bankruptcy industry will continue to get rich on the bankruptcymisconduct.

>And there is no regulation of the corruption that goes on in the bankruptcy courts.

Jim in San Marcos said...

Hi Anon

I agree, but you threw me for a loop I wrote that article one year and 12 days ago.

You have been doing some deep reading.

I do monitor the older posts, because advertisers link to them to improve their google ratings.

Thanks for reading

letters said...

Hi Jim, it's me again.

I guess we are both prescient. Yes, I was late in responding to your post long ago, but I have done lots of research on mortgage fraud as it relates to bankruptcy fraud. The mortgage meltdown just claimed one of the largest brokerage firms: Bear Stearns. No doubt there will be more. I can assure you that bankruptcy fraud will accompany many mega cases of financial firms that will inevitably go down. I think the next big link to unfold will be revelations of the involvement of Eliot Spitzer and other corrupt officials and former DOJ empolyees in Bankruptcy Rings, some with connections to the Prostitution Ring already exposed. The NeoMafia has fingers in every hole, with corrupt members of Law Enforcement and the Judiciary ensuring their tremendous profitability without fear of punishment.