Is it still a 30 yr. fixed rate
Financial
50k loan
?
10k EQUITY
60k mkt. val.
1st Old Time Bank of Bedford Falls
Originally published April 2008
+
Not that long ago, banks made their money by taking in deposits and making loans. They charged a larger interest rate for the loan than they promised the depositor. Pretty straightforward, I’d say. In fact, I think … I did….. say...
CD’s Savings Checking
Joe Thrifty Saver
+Interest +Fees +Down pymts. = 5-6%
Loan Holding Division
Working Joe Borrower Working Joe Borrower up there stayed pretty happy because his home value went up nice and evenly while he paid down his loan. He kept a nice amount of equity most of the time. He paid the same amount every month for 20-30 yrs. as his income went up. He was living the American Dream!
<1%> = 4-5% reasonable profit
“No, but you ... you . . you're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house . . right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?”
1st Milennial Global Bank of the World
Joe Saver or Retiree
+ CD’s Savings Checking
+Interest +Fees +Down pymts.
Subprime Loan 500k loan
+
LARGER
<100k> EQUITY
Loan SALES Division
400k mkt value
< 1% > = BIG ol’ profits!!!
Look Ma! No debt!
Another big change is the banks and mortgage companies no longer held onto all their own loans. Nowadays, they package and Bank sell them to investment B alance Sheet firms, who sort and bundle them and sell Assets +5 Liabilities - 0 them to investors—-a lot of whom are hedge funds. What the banks did, in effect, was shift their risk, their liability for potentially dodgy debt, off onto the investing public. Brilliant! (if you’re a bank).
Bank bundles and sells loans
Mortgage pymt.
ABC Investments
XYZ Loan Servicer
Buy loans, repackage, sell as securities
Gets a small cut Sometimes the bank owns this.
Sometimes the bank owns this too!
CMO’s CDO’s Mortgage-Backed Securities
commissions
But things changed in the early to mid 90’s. Housing prices were going up fast, and mortgage lenders started making loans to folks they wouldn’t have done business with before. This type of loan is called subprime. A subprime loan might be bigger (Jumbo Loans), but all subprimes carry bigger fees, bigger interest, bigger everything! Where folks got into trouble was with socalled “exploding ARM’s.” These loans start off at about 7% & blow up to 12% after 2 yrs. A $1200 payment became $1680 overnight. And that’s just the loan. 75% of those loans didn’t have Tax & Insurance Escrow. So folks robbed Peter to pay Paul & got behind on everything.
Pass through pays investors
These are the amounts which are now in question
When the housing bubble burst, Working Jo(e) Borrower was left owing more than the house could be sold for. Some Jo(e)s were told they could re -fi when the initial low “teaser” rate reset, but the resulting credit crunch made any chance of that bleak indeed. 70% of those loans had prepayment penalties...yikes! For them, the American Dream was fast becoming the American Nightmare.
“But I thought the banks were in trouble too!” Ironically, some banks, like the ones who owned their own investment arms, bought their own investments. Some held them for awhile, then sold them at a loss— -who knows why. You may also have heard that banks are “writing off” billions of dollars. Nobody knows what anything’s worth, so investors aren’t willing to buy these securities or bonds. It’s tragic because different calibers of debt are all tangled up together, and they can’t figure out how to unravel it. So in the interest of moving ahead, they’re choosing to write it all down to zero as a worst –case-scenario. The hope being they’ll come
Hedge Funds And Investing Public
out better than projected when it all shakes out. If you’re completely befuddled at this point, please don’t feel bad: you’re not alone. Some of the best financial minds in America can’t figure it out either.
See the next page to find out how you can still say: Financial
The Blame Game: An Exercise in Futility In no particular order...
"You're thinking of this CDO all wrong. As if they had the money back in a safe. The money's not here. Your money's in a super senior synthetic tranche hedged with a CDS on Joe's house...right next to yours. Supported by the excess spread from the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending the Orange County firemen's retirement fund the money to short builders commercial paper, and then, they're all going to pay it back to you as best they can.”
Banks
-For walking away from their core business & getting fancy?
Mortgage Lenders
-For pushing loans on homebuyers who couldn’t see the bubble would someday burst? -For writing “no documentation” loans? -For taking the profit w/o taking the risk? ie: letting the risk (red lines) fall on the investors
Mortgagees
-For taking on more debt than they could afford?
Bond Rating Agencies
-For inaccurately rating the debt AAA?
Bond Insurers
-For perhaps not truly understanding the product they were insuring?
Financial Institutions
-For pushing investments w/o full understanding on either end?
Investors
-For over-exuberantly purchasing said investments?
Real Estate Speculators
-For building homes for exactly whom? -For “flipping” and not leaving enough affordable inventory for lower-income home buyers?
Former Fed Chairman Alan Greenspan
-For overseeing a financial boom nobody had any problems with at the time? In other words, what goes up must come down, and the higher they are the harder they fall…. -And just generally because everybody else is blaming him. If you’ve got to pick a scapegoat, he’s an easy mark.
Yet why do we have to pick a scapegoat at all? It’s like sand in the hourglass or toothpaste in the tube. Anyone who’s seen The Lion King knows you put your past in your behind and move on. History’s great use is as a learning tool. Let’s hope everyone’s learned some small lesson, because history repeats itself and wouldn’t it be nice if next time it’s not so rough?
Found on an advisor’s forum — apologies to Frank Capra
This is what’s being wrestled with right now and causing so much anxiety... When the foreclosures happen, who really owns the home (mortgage) ? What do they own?
The investors do...we think.
Not what they thought. At the very least, a higher risk investment than they believed. (grossly simplified answer)
Whose fault is it ?
????? See above.
How do we fix it?
Short answer? Nobody knows. But the courts, the Federal Reserve, the Treasury Dept., and the G7 Economic Summit are working diligently upon it.
What can I do?
Read my newsletters...so you can… Become educated….so you can… Understand reality vs. hype...so you can Find a Financial Advisor you can trust...so you can… Stop worrying so much about $$$...so you can… Sleep at night and live the life you want to live.
You CAN.
Mike Bosso Financial Advisor (971) 212-9464 mike@cascadiawm.com
Investment advisor representative offering securities and investment advisory services through MultiFinancial Securities Corporation, member FINRA, SIPC. Cascadia Wealth Management is not affiliated with MultiFinancial.
It’s like when the flight attendant advises you to put your own oxygen mask on first—before you try to help anyone else. Eventually, you often realize, there’s nothing you personally can do about a situation—-so what’s the point in worrying?