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comment by crafty
crafty  ·  3020 days ago  ·  link  ·    ·  parent  ·  post: Mortgage theft is alive and well

The US justice system never fails to disappoint me. I enjoyed the Money as Debt documentary you linked a while back; it's amazing that these people were essentially printing money left and right, and when the whole mess collapsed, these bad actors never got cleaned up. I suppose part of the reason is that it's hard for simpletons like myself to wrap my head around how these "instruments" work.

The idea of a mortgage makes sense; the homebuyer signs a contract, the bank gives out money and holds on to the deed until either the terms of the contract are repaid and the homeowner is given the deed, or the obligations go unfulfilled, the bank kicks the person out and auctions the deed off. Banks didn't want to sit there for thirty years with this whole contract/deed thing, so they were bundling them up and selling them to other investors/banks so they could have the money without the liability. Now, when people can't pay their mortgage, who owns the deed when these mortgage-backed securities had been resold all over the market? Am I understanding this right? How could they not keep track of this? Why not just outlaw these mortgage-backed securities?

kleinbl00  ·  3020 days ago  ·  link  ·  

So there are a couple things going on here. The financial system as outlined in Money as Debt is the GOOD way. That's what's SUPPOSED to happen. Fractional reserve banking is the system that built the world from the Renaissance forward so it's not the problem. There are two aspects to what you're talking about above, (1) the failure of the banking system (2) robosigning and predatory repossession.

I had to read about five books before I understood the economic collapse of 2008, so bear with me if this gets complicated. I'm going to try and simplify things but it's gonna be tough. Here goes:

The instrument of destruction of the finance industry was the Credit Default Swap (CDS). This is basically an agreement that says "I am going to buy and sell the risk of someone defaulting on a loan." The problem is that the more likely something is to default, the more profitable the CDS is, both to buy and to sell. So the banks started writing riskier and riskier mortgages because the CDS they wrote on those mortgages made them more and more money. Unfortunately, the money made buying and selling CDS (and derivatives, and 2nd-degree mathematical instruments) is underpinned by the fact that you're giving hundreds of thousands of dollars to people who will never be able to pay you back. This leads to a spiral of easy money, higher prices, more risk and more CDS until suddenly, people start defaulting on their mortgages and the whole castle in the sky comes crashing down.

So there's the first factor - banks selling things that don't physically exist underpinned by the likelihood of mortgages failing... without recognizing they were writing a bunch of doomed mortgages. The second factor is all these CDS required "holding the note" on the mortgages - literally, physically possessing the deeds on people's houses. And since the banks were "commoditizing" these deeds to create "securities" that could be traded like stocks (literally), what was an orderly pile of real estate deeds became a giant intercontinental game of 52-pickup as everybody scattered the ownership of millions of homes to a bazillion and one securities firms, auction houses, brokerage firms and other securities traders.

So okay. The bottom has come out of the market. There's four million houses in arrears and your job is to try and turn those outstanding mortgages back into money through repossession. Here are your logistical issues:

1) You're not a real estate agent.

2) Foreclosures never happened at this rate before.

3) You have no fucking clue where "the note" - the deed to the house - actually is. Our mortgage changed hands four times between 2005 and 2007 and my wife bought the house in 2000.

4) You have to present the note in order to legally foreclose.


Securitizing mortgages into CDS made banks write stupendously bad mortgages


Once those stupendously bad mortgages exploded, no one could really prove who "owned" them because they'd been securitized.


The banks made up paper trails proving they owned houses they couldn't otherwise prove, which is bald-faced fraud.

PuffinMcDuffin  ·  3019 days ago  ·  link  ·  

Thanks a lot for that explanation. It has really cleared things up for me. To put it in very simple terms the banks were like a person addicted to gambling right?

kleinbl00  ·  3019 days ago  ·  link  ·  

mmmm, no. There was no "gamble" there. The banks were profiting handsomely from behavior that would eventually do them great harm. You also have to keep in mind that a corporation is not a person, no matter what the Supreme Court may think: a publicly traded company has a fiduciary obligation to its shareholders to maximize value and dividends. If Washington Mutual is making money hand over fist with CDS, there will be intense pressure on Wells Fargo to play the same game. And there was, and people lambasted Wells for staying clear of CDS, and analysts were mad, and the stock was punished, and then CDS exploded and everyone was all "huh. Wells Fargo. What a prescient company."

When you've got a corporation with 10,000 employees, eight divisions, 900 offices and presence on three continents, it's easy for one part of the company to do something terrible for the rest of the company. The CDS guys were making shit-tons of money while the mortgage departments were sowing dragon's teeth. My favorite irony was how hard WaMu lobbied to get the bankruptcy laws changed so that you couldn't Chapter 13 away your credit card debt. This was great for the credit card division because now they got lotsa money. Unfortunately everyone who couldn't pay their credit cards and their mortgage said "okay, fuck the mortgage then" and WaMu's $10k credit card debts got paid while their $250k mortgages did not.

And that's about when all the clever financial pundits start saying things like "hey, a mortgage is a contract. You agree to pay it, they agree not to take your house and trash your credit rating. You're going to lose the house anyway and is your credit rating really worth $4000 a month? Walk the fuck away." And all of a sudden the market starts talking about "moral hazard" and the banks start screaming for the return of debtor's prisons and the housing blogs start posting Slayer videos but at the end of the day, you shouldn't give money to someone who can't pay it back.

So, gambling? no. Self-absorbed self-interest? Absolutely.