Economic Despair

Showing posts with label subprime lenders. Show all posts
Showing posts with label subprime lenders. Show all posts

Banks have lost $195 billion in asset writedowns and credit losses since the beginning of 2007, including reserves set aside for bad loans, at more than 45 of the world's biggest banks and securities firms.

There is a bubble in the bailout costs. The numbers keep getting bigger...

Last week, it was a $200 billion cash-for-bond swap for the banks. This week, it was a $200 billion bond-for-bond swap for the big investment houses. If they keep this up, pretty soon you'll be able to walk into any Federal Reserve bank and hock that diamond brooch you inherited from Aunt Mildred.

Forget all that nonsense about the Bernanke Fed being too timid or behind the curve. In the face of what is turning into the most serious financial market crisis since the Great Depression, the Fed has been more aggressive and more creative in using its limitless balance sheet -- in effect, its ability to print money -- than at any time in history.

We can argue till the cows come home about whether this is a bailout for Wall Street. It is -- but only to the extent that it is also a bailout for all of us, meant to prevent a financial and economic meltdown that drags everyone down with it. In broad strokes, we're going through a massive "de-leveraging" of the economy, wringing out trillions of dollars of debt that had artificially driven up the price of real estate and financial assets, and, more generally, allowed Americans to live beyond their means. The Fed's goal has not been to impede that process, simply to make sure that it proceeds in an orderly fashion. But even that has required central bank intervention that is unprecedented in scale and scope. And despite yesterday's huge rally in the stock market, Fed officials warn that this de-leveraging is nowhere near finished.

Making Wall Street pay for subprime? I can't see that happening.

BOSTON (AP) -- Regulators are trying to punish Wall Street for mortgage finance practices that expanded home ownership and spread risk among a host of new players -- but also may have duped borrowers and investors who supplied cash to fuel a housing boom that's turned bust.

A handful of state securities regulators and a couple foreclosure-blighted cities have fired the opening shots with lawsuits trying to prove that investment banks and big lenders are guilty of more than just bad business decisions and failing to foresee looming mortgage troubles. Some regulators say greed and fraud underlie much of the subprime mortgage mess that has spread across the broader housing market, triggering a spike in foreclosures.

Aside from the civil cases, the FBI is looking at possible criminal action, focusing on what Wall Street firms knew about the risks of mortgage securities backed by subprime loans, and whether they hid risks from investors.

From the Wall Street Journal.....

U.S. Mortgage Crisis Rivals S&L Meltdown

The home has long been the bedrock asset of most American families. Now, its value has become the biggest question mark hanging over the global economy and financial system.

Over the past decade, Wall Street built a market for more than $2 trillion in securities sold globally and backed by loans to U.S. homeowners on two long-accepted beliefs and one newer one. The prevailing logic: The value of the American home would never fall nationwide, and people would almost always make their mortgage payments. The more recent twist: Packaging mortgage loans and turning them into securities would make the global economy more resilient if anything went wrong.

In a matter of months, though, much of the promise of the new financial architecture -- together with its underlying assumptions -- has proven to be a mirage. As house prices fall and homeowners default on mortgages at troubling rates, the pain has spread far and wide. An examination of the resulting crisis shows that it is comparable to some of the biggest financial disasters of the past half-century.

So far, the potential losses look manageable compared with the savings-and-loan crisis of the 1980s and the tech-stock crash of 2000-02. But the housing debacle could yet take years to work out, thanks to the sheer complexity of it. Until the mess is cleaned up, investors will remain jittery and banks will likely hold back on all kinds of lending -- a credit crunch that is already damping global growth and could tip the U.S. economy into recession.

The new financial system -- shifting risk from banks to securities markets -- has worked "pretty well" up until now, says former Federal Reserve Chairman Paul Volcker. "We're going to find out if it works well for a major-league crisis."

To ease the pain, the Federal Reserve has cut short-term interest rates twice and is expected to cut them further tomorrow. The Bush administration has also pressed for private-sector curative measures. First, it urged big banks to create a new entity to buy some mortgage-linked securities that don't have a ready market now. And a plan finalized last week calls for freezing interest payments on perhaps hundreds of thousands of qualifying homeowners whose mortgage notes are set to rise. (See a primer: Will the Rate Freeze Help You?) Both ideas are controversial. They are hailed by some as well-conceived financial first aid and criticized by others as inadequate -- or an impediment to crisis resolution.



.....at least back in July 2007. Wonder what he think now?

It is not just the poor who are losing out from the housing crash; the rich are also taking a hit. Caliber Global Investment Ltd., a $908 million fund, will close after running up losses in the sub prime mortgage market. The fund reported an almost $9 million loss in the second-quarter. Meanwhile, another London based hedge fund - Queen's Walk Investment Ltd - stacked up a $91 million loss during the first quarter of this year. Again, most of the losses were due to rising defaults in the US sub prime market.

Thus, it would seem that investors have suddenly rediscovered that risk exists in the housing market. Between 2001-06, investors had systematically and wilfully mispriced the potential losses from the US housing bubble. Now, investors are desperately running for the exit, frantically avoiding the investment products that they purchased with abandon during the exuberant years of double digit house price inflation.

Yet, here is the great mystery of today's housing crash - risk is not a difficult thing to understand. If a financial institution gives a borrower with a poor credit history a massive loan to finance an overpriced house, then the probability of default is rather high. In principle, this increased risk should be reflected in the interest rate charged to the borrower. This simple observation seems obvious now, as default rates are rocketing. Yet somehow, this was all forgotten during the crazy hazy speculation of 2003-5.

Unfortunately, mispricing risk wasn't the only stupid thing that mortgage lenders were doing. They were also backend loading interest charges through teaser rates and complex adjustable rate mortgages. In effect, institutions pushed their problems out two years by offering inappropriate mortgages to people who didn't understand the financial products they were buying. It was as if the sub prime industry had designed a marketing strategy that would maximise the chances of a wave of defaults.

Now, losses are piling up, and default rates are undermining any prospect of a recovery in the housing market. Not that the prospects for a recovery were ever going to be particularly high. The market remains fundamentally imbalanced. With inventory rising to all-time highs, and prices falling, the correction has a long way to go yet. Nevertheless, the sub prime crash has the potential to undermine housing finance for years to come. With investment funds abandoning the sub prime market, stung by a large losses, it will take a long time before investors feel confident enough to return. As the supply of funds drying up, the number available mortgages will likewise diminish.

Today's housing market has become one massive wealth destruction machine. The poor sub prime borrowers can't afford the houses they are living in. As they default, they incur personal losses which they cannot cover. These losses end up on the balance sheets of sub prime lenders, whose investors ultimately take the hit. Everyone loses; all are to blame; all are punished.

Today, Bloomberg carried a story suggesting that the losses experienced from the housing market could be "just the tip of the iceberg". Anyone who has followed the housing bubble blogs will know that this sorry reality has been known for quite some time.

Too many adjustable mortgages, coupled with lax lending standards, and an explosion of property prices; that is hellish brew. It will lead to only one outcome; massive defaults followed by a financial crisis. This is what we see now emerging, with almost daily news stories highlighting banks in trouble and foreclosure rates going through the roof.

June 22 (Bloomberg) -- Losses in the U.S. mortgage market may be the ``tip of the iceberg'' as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said.

Homeowners with about $515 billion on adjustable-rate home loans will pay more this year, and another $680 billion worth of mortgages will reset next year, analysts led by Robert Lacoursiere wrote in a research note today. More than 70 percent of the total was granted to subprime borrowers, people with the riskiest credit records, they said.

Surging defaults on subprime loans have pushed at least 60 mortgage companies to close or sell operations and forced Bear Stearns Cos. to offer a $3.2 billion bailout for one of two money-losing hedge funds. New foreclosures set a record in the first quarter, with subprime borrowers leading the way, the Mortgage Bankers Association reported.

Bear Stearns, the second-biggest underwriter of mortgage bonds, offered to provide $3.2 billion of financing to rescue one of its hedge funds. Concern about the collapse of the funds, which made bad bets on securities tied to mortgages, sent bonds and stocks of finance companies lower.

Homeowners who can't afford to pay higher interest rates may struggle to sell their properties as home price increases slow, and stricter lending standards will make it harder to refinance, the Bank of America analysts wrote today. Interest payments on about $900 billion of the riskiest subprime home loans are due to increase this year and next, they said.

Countrywide Financial Corp. and IndyMac Bancorp Inc., two of the largest U.S. home lenders, may suffer more than other finance companies because they hold mortgages as well as selling them off to investors, the analysts wrote. The companies may not have set aside enough money to cover losses, said Bank of America, which has a ``sell'' recommendation on both lenders.

The proportion of income that U.S. households with mortgages used for making payments in the first quarter of 2007 was close to or above the previous high in the late 1980s and early 1990s, the analysts said. U.S. mortgage borrowers will continue to find it harder to pay their debts until the end of next year, the analysts said.

Paulson thinks that the housing correction is "at or near the bottom". That is a sure sign that the housing market has still got a long way to go before things stabilise.

WASHINGTON (Thomson Financial) - The US housing market correction is 'at or near the bottom' but the fallout from problems in the subprime mortgage market will likely continue, Treasury Secretary Henry Paulson said. Paulson said losses related to foreclosures in the subprime market were to be expected in light of the 'major' housing correction the US has gone through. At the same time, he believes the risk in this area is 'largely contained,' and poses no threat to the overall economy.

I don't know how Casey Serin does it. Everyday, I promise myself that I will not look at his blog. However, at some point in the day, my fingers move faster than my brain, and I end up clicking on his link and having a quick look. He never disappoints; he always has some crazy story about some madcap financial wheeze.

One recent post absolutely blew me away. It concerned the foreclosure sale on his Larchmont property. According to Casey, he bought the property for $330,000 in March 2006, with 100 percent financing. Casey claims that the property was irresistible because he negotiated a $50,000 cashback. He wanted the money to “float other properties” that he was buying at the time.

Like all of Casey's real estate investments, this one went into foreclosure. Recently, the bank sold the property for $199,000, meaning that our friend Casey now owes the bank a cool $131,000. What is more, Casey has seven other real estate investments that probably lost a similar amount of cash.

It is worth stepping back from and thinking through what actually happened here. Casey went into a bank, probably misled the bank about his true financial status and walked out with $330,000. He then bought a house that was at least $50,000 overvalued at the time of sale. A year later, he loses the house, and stacked up a debt equivalent to almost 4 ½ times his previous annual income (Casey was earning around $30,000 before he became a property tycoon).

So who gained from this ridiculous enterprise? Top of the list comes the Realtor, who probably pulled out 6 percent of the sale value. The original owner of the house also did well; selling an asset for $270,000, when a year later it was only worth $199,000.

However, the bank shareholders were the big loser. The bank has no prospect of getting back the $131,000 it lost on this loan. That loss will mean a lower dividend for shareholders this year. However, there remains a mystery; why have bank shareholders been so quiet in the face of this overwhelming mismanagement of their assets? The bank management who presided over this loan transactions are totally incompetent. How could they have allowed someone like Casey could to walk into their bank and convince a loan officer to give him such a massive loan with 100% financing? If I were a shareholder, I would be outraged at this incredible misuse of my investment.

Over the last couple of months, Casey has been the subject of an extraordinary wave of abuse. However, Casey's financial idiocy could only have taken place because there were even greater finanial idiots out there - the banks and in particular, their loan officers. This explains why I keep coming back to his blog, I keep searching for the answer to the question how could anyone seriously give Casey a loan? Unfortunately, I haven't yet found the answer on his blog, so I keep coming back.

I fell out of my chair laughing when I read this article from Realty Times. According to the joker who wrote this article, there is no risk in real estate; there is no real estate bubble; and that value is a complicated cocktail. In fact, this article is so ridiculous that one has to think that it is a spoof.

I was also struck by the inverted conspiracy theory. Normally, we think of the media as being a cheer leader for the housing bubble. Not according to this article. Instead, the media has been talking real estate down way too much.

Perspective can be a funny thing.

Real Estate Sky Won't Fall: Here's Why

Real estate hasn't made much of a case for itself lately and it's not getting much help from any of the sub industries, such as builders and mortgage makers. Just in the past few weeks, so called experts from the mortgage industry, the building industry, and the resale real estate industry have all been quoted as saying that the sky is falling. Nice job guys! And while real estate's reputation as the number one investment is on the ropes, the general media and other investment categories have stepped up their attacks on real estate value. What do you need to know?

The real estate market always fluctuates.
Real estate sales prices are largely determined by the principal of substitution and reflect the uniqueness of the property, at a specific point in time, competing against only those other similar properties that happen to be available for sale, at that point in time.

If there are many similar homes available at that time, there will be downward pressure on sales prices. As an expanding population absorbs the excess, competition for a dwindling resource will cause selling prices to escalate.

Real estate is unique.
There's a reason that homes and real estate aren't traded like commodities on the Chicago Mercantile. They are too dissimilar. Even each tract home has a somewhat different location, orientation, lot dimension, proximity, and view.

There is no bubble.
The value of real estate isn't driven by speculation; it's driven by its utility. If the economy moves away, such as in the rust-belt, that utility may decline. If high paying jobs are headed into a region, the value of the scarcest of all commodities, real estate will rise. Increasing development costs absolutely guarantee that new construction will cost more than existing properties are selling for. This factor alone has caused many developers to mothball projects in the pipeline until shortages again push prices up.

Value is a complicated cocktail.
Assessed value, appraised value, market value, replacement value, and selling price all mean something different. When the media says that real estate values are falling, they really mean that the prices people paid for a small number of homes, last month, was less than what a different group of people paid for a different assortment the month before.

There is always a baseline of demand.
An increasing population must be housed. There is a natural ebb and flow, not a boom bust. At various times, demand outstrips supply; supply is increased until the surge recedes to baseline or below.

There is always a baseline of mortgage defaults.
There will always be unforeseen circumstances that will bring some homeowners into default. Even in good economic times. And even with good mortgage loans. In an appreciating market, they are able to sell in a short period of time. So, in most markets, foreclosure activity has been below the historic baseline.

Now, it could increase, spiking a little to reflect those who can no longer survive on increasing equity and then may level out at baseline again. When the next rapid appreciation cycle begins, and it almost assuredly will, rates may fall back below the newly adjusted baseline.

There is no risk.
Save the term risk for high stakes poker in Vegas. Buying real estate isn't inherently risky. But it isn't a get-rich-quick scheme, either. It's a formula for building long term wealth.

Real estate is a great way to build wealth.
You have to live somewhere. If you rent, you are making some or all of someone else's mortgage payment. But even if you have to work two jobs and barely scrape by to make your own mortgage payment, you are building equity that over time will be quite substantial. So, perhaps, don't believe every "the sky if falling" report or article. Educate yourself on the market and happy wealth homeowning!

At the height of the housing bubble, there was one thing I could not understand; "how could people convince themselves that they could afford the mortgage payments that seemed to be at least as large as their monthly incomes". It was this, more than anything, that prevented me from buying a house. I just couldn't make sense of the numbers. I would look at my paycheck and then look at the estimated mortgage costs and local taxes. It didn't add up. However, it seems that other people weren't using much arithmetic.

(SGV Tribune) Now that some of the dire fears about adjustable-rate mortgages and subprime loans are proving true, lenders and nonprofit groups are rushing to come up with ways to slow down the defaults and foreclosures. Institutions behind these assistance programs say that a lot of homebuyers were duped or deceived into signing bad loans. The main goal, they say, should be to keep people in their homes.

But there's also a growing call from mortgage brokers and other market watchers for struggling buyers to take some personal responsibility for their decisions. After all, they say, nobody forced them to sign these loans. "We're going to give somebody a crutch all because they couldn't spend a day in a seminar to find out about the loan products, and now they're saying, `Nobody told me there was education,"' said Richard Pittman, director of housing and counseling at ByDesign Financial Solutions, a credit counseling nonprofit based in Commerce.

"Come on, get your paycheck out and look at it next to your loan statement. You didn't realize the $4,000-a-month payment was going to take 92 percent of your paycheck? ... There's a point to tough love, when you say this is a learning experience."

The NAR just published this quarter’s house price data. No surprises here; prices are falling; the bubble is definitively over. Here are the sorry details:

• During the first three months of this year, the nationwide median price for houses and condominiums slid 1.8 percent to $212,300.
• Prices are at a two year low.
• Over half the cities in the US experienced declines.
• Sales are down 6.6 percent compared to last year.

Just to complete the grim picture, here are a few additional numbers, which again confirm that the housing market is in the middle of a massive recession:

• The National Association of Home Builders/Wells Fargo index of sentiment fell to 30 this month from 33 in April, matching a 15-year low reached in September.
• In April, U.S. foreclosure filings jumped 62 percent compared to last year.

To summarize; prices are falling, sales are falling, and foreclosures are rising. In other words, the market is falling off a cliff.


As the US housing market crashes in flames, the lawyers are moving in, and issuing lawsuits. The lawyers have the mortgage lenders in their sights. The lenders are being accused of pushing inappropriate refinancing options on unwary and naïve borrowers. In some extreme cases, lenders are accused of misleading borrowers over interest rates and fees, particularly when borrowers refinanced.

Mortgage refinancing played a crucial role in sustaining the housing bubble. Maybe the lenders adopted some rather aggressive sales techniques. However, far too many people entered the housing market with a chain of unrealistic expectations.

The chain started with a belief that housing prices never drop. This expectation linked into the idea that interest rates would not go up significantly. These misplaced imaginings pushed borrowers into taking on too much debt to pay for overvalued houses. Interest only loans and teaser rate arms reconciled the borrower’s high levels of debt with stagnant incomes. People could only think of monthly payments, and not long term personal debt sustainability. Finally, refinancing was the last link in the chain. People stupidly thought that they could keep their monthly payments low by periodically refinancing.

It is not hard to see how many borrowers, desperate to refinance, could fall prey to unscrupolous sales pitches. “Oh yes, we can keep your interest rate at just 7 percent, so long as you sign here”. However, refinancing only makes sense as long as rates remain low. Once they rise, the chain breaks, and over-leveraged borrowers begin to understand that the level of debt and not just the monthly payments are important.

Here is a story of one lawsuit from St.Louis. The accusation has a ring of plausibility.

(STL Today, May 10th 2007) Twenty-nine families in St. Louis and four Missouri counties have filed lawsuits accusing Ameriquest Mortgage Co., a California-based mortgage lender, of engaging in abusive practices related to refinancing home loans.

The suits say that Ameriquest encouraged borrowers to refinance their loans by saying they could get better rates. When the loans were refinanced, the borrowers owed more than previously because of prepayment penalties and other fees, and their interest rates went up, not down.

The lawsuits were filed on behalf of families in the St. Louis and Kansas City areas. Four were filed Wednesday in circuit court in St. Louis, St. Louis County, St. Charles County and Jackson County, Campbell said. Another suit was filed March 30 in Jefferson County Circuit Court.

One plaintiff, Harold Bowyer of Festus, refinanced a $107,100 mortgage with a 7.7 percent interest floor and a 13.7 percent ceiling. He was told the new loan would have an interest rate of 6 or 7 percent. But after the new loan was closed, Bowyer learned that the amount he owed had risen to $122,550, including $6,519 in fees. The interest rate floor was 10.15 percent, and the ceiling was 16.15 percent, according to the lawsuit.


Help me out here; I am running out of superlatives to describe the foreclosure situation. In April, forclosures were up over 100 percent compared to the same month last year.

Here is another shocker - 8 out of 10 subprime loans have variable interest rates. Sit back in your chair and think about that one for a moment. Lets repeat; eight out of ten loans given to people with bad credit will shortly reset to higher rates. This means just one thing; the US housing market is sitting on a foreclosure time bomb.

May 7 (Bloomberg) -- U.S. homeowners entered the foreclosure process in April at more than double the rate of a year ago as tightening credit made it more difficult to refinance and a swelling supply of unsold homes made it tough to sell.

The number of homeowners in all three phases of foreclosure rose last month over the same period a year ago, according to Sacramento-based Foreclosures.com, which gathers data from county courthouses nationwide. Those receiving their first notice of foreclosure from a bank climbed 127 percent, those with homes going up for sale by auction jumped 164 percent and those whose homes were repossessed by banks went up 40 percent.

Eight of 10 subprime loans, given to borrowers with bad or limited credit histories, adjust over time to higher interest rates and many homeowners can no longer afford their mortgages. With existing home sales at a four-year low, it's more difficult to sell because there are so many homes on the market.

Banking is a simple business; you take deposits, and you extend loans. So long as your loans are good, and your interest rates competitive, people are generally happy depositing money in your bank. However, competitive interest rates often means that profitability in the banking sector is quite low. Banks can only increase profitability by increasing volumes, which means taking on riskier loans. It is a strategy that has the potential to send a bank into bankruptcy. When a bank increases its lending volumes, it does so by reducing lending standards. It spends less time checking on the credit worthiness of its borrowers.

Now the New Century Financial is bankrupt, the true story of its extraordinary growth is coming to light. Guess what; it is a textbook case of a bank gone bad. Management focused on volumes and not on asset quality. Loan appraisers were told to ignore the risks from clients with dubious credit histories, and issue the loans. Inevitably, New Century Financial ended up with a loan portfolio riddled with defaults and foreclosures. Once this fact became public knowledge, the companies' financiers pulled the plug, and took away their deposits.

In today's Washington Post, a loan appraiser tells the hair raising story of what went on inside the company. The lesson is a simple one, if the lender doesn't allow it appraiser is to assess risks, the lender will end up with a lending book full of bad loans, and it will go bust.

The New Century saga raises very difficult questions for the Financial Sector Regulator, who was supposed to oversee and prevent lenders from behaving like this. After all, it is not the first time that the US has suffered from failed banks. So what exactly were they doing when New Century middle management were walking around with baseball bats intimidating loan appraisers?

(Washington Post) Maggie Hardiman cringed as she heard the salesmen knocking the sides of desks with a baseball bat as they walked through her office. Bang! Bang! " 'You cut my [expletive] deal!' " she recalls one man yelling at her. " 'You can't do that.' “Bang! The bat whacked the top of her desk. As an appraiser for a company called New Century Financial, Hardiman was supposed to weed out bad mortgage applications. Most of the mortgage applications Hardiman reviewed had problems, she said.

But "you didn't want to turn away a loan because all hell would break loose," she recounted in interviews. When she did, her bosses often overruled her and found another appraiser to sign off on it. Hardiman's account is one of several from former employees of New Century that shed fresh light on an unfolding disaster in the mortgage industry, one that could cost as many as 2 million American families their homes and threatens to spill over into the broader economy. New Century has become the premier example of a group of companies that grew rapidly during the housing boom, selling working-class Americans with questionable credit huge numbers of "subprime" loans with "teaser" rates that typically rose after the first two years. This business transformed the once-tiny New Century into a lending powerhouse that was held up as a model of the mortgage industry's success.

Hovnanian Enterprises - the new home builders - announced another quarter of dreadful numbers. Second quarter loses could be as high as $0.30 a share, far worse that the company's original suggestion of a $0.05-0.20 per share loss. Furthermore, the company also expects to take a $15-20 million hit on abandoning deposits on land it would not develop. Overall, their losses could be as high as $0.45 to $0.50 per share.

The company trotted out the housing sector's excuse of the moment - the subprime market, announcing that "The adverse publicity surrounding the subprime market has further damaged homebuyers' psychology, resulting in decreased demand and leading to continued use of sales incentives." However, Hovnanian were hardly catering for the subprime client. Nevertheless, the subprime crash is the housing equivalent of the black death; it kills everything it touches.

Sales performance was awful. Hovnanian delivered just 3,196 homes, down from 4,555 last year. However, the company had some limited success in reducing cancellations which fell from 36% to 32% compared to the last quarter of 2004. Looking forward, things look bad, with net contracts were down 21% to 3,116.

Hovnanian share prices are down a shocking 67 percent since their peak in the summer of 2005. Who would have known back then that housing construction shares would have been such a bad investment? Actually, anyone who had bothered to think about the bloated housing bubble. It was obvious that it couldn't go on and that Hovnanian Enterprises would be an early victim.

Check this link out from the Minneapolis Star Tribune see the extent of foreclosures in the city. It contains an extraordinary graph illustrating the housing disaster in the city. Since January 2006, over 2,500 homes have been sold in foreclosure sales.

This article reports that there "have been 1,400 foreclosure sales in North Minneapolis since January 2006. This is an area of less than 9 square miles that contains 12,810 single family residences. Meaning: 10.9% of the houses in North Minneapolis have already gone through a foreclosure sale since the real estate collapse began."

One house in ten? This has got to be a national record. Is there anywhere in the US with a higher foreclosure rate?


This is where it started, with phonecalls just like this....

This video clip began circulating last June. It shows a mortgage broker trying to close a three year ARM over the phone. The clip reeks of cynicism, as the broker tries to get the client to refinance their mortgage. His associate, who is out of camera shot, is heard saying " say don't worry", as if this is all that is necessary to finally close a deal. The irony, however, is is that anyone holding an ARM has quite a lot of worry about. As the fixed interest rates expire, mortgage repayments are going through the roof, and pushing many vulnerable home-owners into foreclosure.

There is a reason why financial markets are regulated. Society needs protection from unscrupulous lenders who will mislead and defraud vulnerable borrowers. However, it is strange how such simple truths can be forgotten, and then suddenly remembered when it is too late.

The subprime crisis is such an example. We have known since the beginning of time that poor folks don't make great borrowers. So, it is prudent to ensure that lenders keep away from such people. The poor tend to default on their loans, and defaults tends to create financial problems for banks.

However, the mortgage broker enters the scene. The broker feels no responsibility to either the bank or the client. He is only interested in commissions, which can only be maximised by loan originations. Without any responsibility, the broker sells loans to those who cannot pay them back. Moreover, he develops a series of unscrupulous sales techniques that lures the unwary borrower into a financial hell on earth.

Here is the story of one devious mortgage broker from the AOL real estate website.

A Mortgage Broker Reveals the Tricks of the Trade

AOL Real Estate

"There's an old saying in the mortgage broker business: The biggest liar gets the deal," says one home loan broker who has been in the business for more than 15 years. We'll call him Victor to protect his identity.

"When I price my loans, I price at the point where my buyer can't get a better loan anywhere else. That's how I sleep at night. But the other rule is to get as much from the borrower as they can before they notice. Most agents do the latter," says Victor.

It's hard to ignore the news lately about sub-prime mortgages, predatory lending and the surge in foreclosure rates. Making sense of how this debacle happened is another story. We want to find out how you can avoid common mistakes when seeking a loan. So we decided to have a very candid discussion with Victor, who's an industry veteran based in California. In his nearly two decades of lending, he has never seen anything quite like today's landscape.

A Loan with Just One Hitch

One of the most disturbing loan trends he talks about became very popular between 2001 and 2005. It's called a negative amortization loan. This is when a borrower can't afford a high interest rate because the monthly payments are too high. To close the deal, the loan agent comes up with a monthly payment and interest rate that satisfies both the borrower and the lender.

"They give the borrower a lower monthly payment based on a 1 percent or 2 percent annual interest rate, but the rate on the actual overall loan is much higher," says Victor. "So let's say the real rate is 7.5 percent, but their monthly payment is based on a 2 percent annual rate. The 5.5 percent interest they are not paying each month goes onto their balance, which means the total loan amount keeps getting bigger. So in a short amount of time, you're upside down." You can easily see why this leads to trouble. If the price of your house is not going up, but your mortgage balance is rising … it's a matter of time before you owe more on the house than it's worth. That is, unless you refinance or take on a higher monthly payment.

Victor says a lot of loan brokers, "prey on the ignorance of the consumer. The consumer is like, 'Oh gosh, I'm getting a 1 percent or 2 percent loan.' They don't understand there are no free lunches. Every month, they are losing equity. These loans have been around since the early '80s, but it wasn't until recently that the loan values were 95 percent of a home's value, compared to tougher standards like 80 percent loan to value"


It was as certain as day follows night. Investors start to lose mony on subprime-backed investment bonds. Then the lawyers turn up. It will soon be bubbletime for law suits, as investors try to shift the blame onto the investment backs. Credit Suisse are the first bank to suffer the legal wrath of angry investors. However, they won't be the last.

You can just imagine the shock when investors woke up to the subprime collapse. "What, you didn't tell us that we could lose money on real estate". Yes, you can lose on real estate. That is the great lesson of 2007.

Let's repeat that; Yes, you can lose money on real estate.

April 27 (Bloomberg) -- Credit Suisse Group was sued by a Florida insurer that says it lost money on investment-grade bonds backed by subprime mortgages sold by the bank.

The suit, filed in Florida by Bankers Life Insurance Co., is ``one of three to five in the pipeline'' involving securitizations by Credit Suisse, Switzerland's second-largest bank, said Dale Ledbetter of Ledbetter & Associates P.A., one of two law firms representing the Bankers Financial Corp. unit.

"We suspect that once people understand what occurred here, there's going to be a lot more," Ledbetter said. A total of $302.6 million of bonds were originally issued in the deal.

Bankers Life, based in St. Petersburg, is seeking to recover about $1.3 million to make up for losses of principal, interest and market value on about $1.4 million of the 2001 bonds it bought in 2004, Ledbetter said. Other investors considering suits will probably seek between $500,000 and $3 million each, he said.