Monday, November 26, 2007

Who Are The Winners in the Mortgage Mess?


By John W. Schoen
Senior Producer

The financial markets are pretty skittish these days as banks and other mortgage lenders continue to report big losses from mortgage loans gone bad. But in any market, one person’s loss is often another person’s gain. So where did all those “losses” from bad mortgages go? And are there any winners in all of this?

Recently you see in the headlines all of the big banks "losing" billions of dollars from their participation in the "subprime" mortgage game. What does it really mean that they "lost" this money. It didn't just disappear. Someone gained on this loss, who?— Rodney Detroit, MI
There may be some potential winners in the Mortgage Meltdown of 2007, but much of the money now being reported as “lost” will never reappear. In some cases, it was never there to begin with. So think of it as having gone to Money Heaven.

For now, the estimates of eventual losses — as much as several hundred billion dollars — are only estimates. Part of the reason is that the story is still being written. Some 2 million homeowners are at risk of defaulting on adjustable loans in the next year or so when those loans “reset” to higher payments. If those loans can be refinanced at more affordable terms, many of those people will be able to continue making payments and will avoid becoming the next foreclosure statistic. If those foreclosures can’t be avoided, you can expect to see reports of additional losses as more loans go bad and more unsold homes get dumped on an already falling housing market.

So far, the losses are being felt in several different places. The first place they’re hitting is the lenders and investors that put up the money used to fund the big pools of mortgages that Wall Street couldn’t get enough of during the housing boom. With home prices rising, lenders assured buyers eager to own a home that they could afford the big fees and high interest rates.

These investors — everyone from hedge funds to insurance companies to wealthy individuals — were looking for the higher returns they could get from bonds that were backed by the monthly payments generated by pools of bundled mortgages. The value of those bonds — and the price investors paid — was determined largely by computer models. These complex formulas looked at borrowers’ credit scores, historical defaults rates, interest rate impact, etc. and helped assure investors they were getting a higher return without taking on higher risk. On Wall Street, that’s a great deal.

In hindsight, the models didn’t work so well. It turns out they didn’t take into account a major bust in the housing market and a full-blown panic in the bond market. When it came time to sell these mortgage-backed bonds, there were no buyers. Even though the bonds are backed by loans which are backed by real houses with real value, in a falling real estate market, no one is quite sure what those houses are worth. And with no buyers, the bonds aren’t worth much.
So when banks and other financial institutions holding these mortgage-backed bonds “marked them to market,” they had to report a big loss on their books. Some adventurous buyers are stepping up and buying these bonds at fire sale prices. If and when the market for these bonds recovers, they may be winners.

The people who wrote these mortgages and then quickly sold them off to Wall Street were also winners. The lenders who originated the loans got paid up front: they collected big fees and then moved on to the next borrower without putting any of their own money at risk. (Some investors are now trying to recover some of those profits in court.)

Homeowners who can’t make their payments are also potential losers: they’ve spent thousands of dollars trying to build equity in a house and will lose all that when they lose their house. When buyers come forward to buy that foreclosed home, they may eventually profit from buying in a depressed market. But they won’t know until the market recovers whether the strategy worked.

Finally, the neighbors of people who lose their homes to foreclosure also lose. Various studies have tried to quantify just how much. But anytime you add a bunch of foreclosed properties to a local market that already has more homes for sale than buyers, the market value of everyone’s house goes down. If you want to identify the winners there, you probably have to look for the home owners who sold during the peak of the housing boom, after years of easy lending pushed prices to unsustainable levels.

Jennifer Bunker CRS GRI
Utah Real Estate Broker


Barbara Ann Jackson said...

subject: Foreclosure Fraud, Wall Street, FREDDIE MAC, Judicial Corruption

Any representation to Wall Street Investors by FREDDIE MAC that FREDDIE’S reported $$$ billion dollar losses are due to people defaulting on their mortgages must be weighed against the fact that (in states such as Louisiana), Freddie Mac is paying DEBT COLLECTION firms needless, outrageous litigation costs for corporate lawyers to outmaneuver –and even persecute people who file court proceedings in opposition to fraudulent foreclosures. In Louisiana, long before Hurricane Katrina, the entrenched real estate and mortgage fraud racketeering scheme has been in operation. But thanks to federal authorities such as U.S. Attorney Jim Letten and U.S. Attorney David Dugas, real estate racketeers in Louisiana have nothing to worry about. Verification of what I have written is posted on my website.
*Also, posted on NEWSBLAZE.COM, see this article: "Mortgage Mess, Foreclosure Fraud and Impediments to Justice:"

Most critical to the Foreclosure Crisis is FORECLOSURE FRAUD, which enables MORTGAGE LENDERS to ILLEGALLY FLIP properties. In Louisiana, 2 particular mortgage companies which benefit from fraudulent foreclosures are Wells Fargo and FREDDIE MAC! It is HIGHLY COMMON for a DEBT COLLECTOR attorney to file a foreclosure: (i) in the name of a DEFUNCT mortgage company;(ii) in the name of a mortgage company which is NO LONGER holder of the security interest (the promissory note); or (iii) file a foreclosure and AFFIX a "ransom" amount (the collector's fee) far exceeding what the promissory note "Acceleration Clause" authorizes.

Despite a property owner's entitlement to Challenge CONTRARY-TO-LAW loss of his / her home, most property owners LACK consumer and legal knowledge; the Court System is REFRACTORY; and there are limited attorneys with acumen to pursue Consumer Law. Also, when borrowers sue for "Unfair Debt Collection Practices," damages, the collector gets to make more $$ through prolonged litigation, as co-conspirators enjoy the foreclosure pie.

Investors need to become more astute about how mortgage servicers' misdeeds hurts borrowers as well as siphons incalculable amounts of money from what Investors should reap. (See "Limiting Abuse and Opportunism By Mortgage Servicers," AND "Private Property Rights Deferred: Has Predatory Mortgage Servicing Destroyed The American Dream" by Rawle Andrews, Jr., Esq.,and Leroy Jones, Jr., J.D. Visit:

Barbara Ann Jackson
Law & Grace, Inc.

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