A Court Ruling Makes Mortgages Vanish Into Thin Air

originally posted by: AugustusMasonicus
a reply to: Edumakated

How does this new ruling impact the homeowner?

It doesn't other than make the underwriting when applying for a mortgage a bit more tedious than it already is in some way...

Anytime a bank loses their ass on a mortgage, they try to understand why and then they start requiring documentation or put restrictions in place to try to prevent it from happening again.

This case is really more about what happens AFTER a foreclosure through between the originating bank and the bank that may have bought rights to that loan. It really doesn't have anything to do with the consumer directly. However, I'm sure it will impact a consumer some way indirectly by ultimately raising cost which will show up in higher interest rates.

a reply to: Edumakated

This is actually what happened during the housing bust. Most of the mortgage companies that failed did so because the secondary market stopped buying the mortgage loans and the mortgage lenders couldn't make any additional loans as their warehouse lines were full. Basically, liquidity dried up.

Well, if you're referring to the 2008 crisis, that's not the worst of it, or even close. In fact, it was only a minor symptom of a much larger disease.

You have to look at "why" the secondary market stopped buying mortgages. And the reason for this was, they couldn't roll all those mortgages into the mystical (and crooked) "derivatives" packages on Wall Street. This is where the whole "toxic debt" phraseology came from. So, they couldn't get out from under the debt either by duping investors thinking they were investing in good debt only to find out it had been laced with all manner of toxic debt. Then, if this wasn't already bad enough, you had the hedge fund market move in and start capitalizing on all these losses by short-selling all these debt package derivatives. (which is why short selling, and or hedge funds, or both, should be either outlawed or made available to ALL investors, which they are not). In essence they were betting on you failing, and "you" in this case was a far larger market share than anyone understood...again, due in large to the whole underworld of derivatives.

So, the financial gymnastics cited in the OP are really just an ongoing CYA battle between the origination market and the underwriting market to cover their asses, create an insurance policy in the form of a legal "out" and make their own investments look safer to investors. This is not to be confused with the "primary" and "secondary" elements of the market. Those markets are risk based. In short, it's "spin" and legal gymnastics geared toward the investment side of the market, not the debtor side of the market.

Honestly, although a bit off-topic, I'm still on the fence about "Too big to fail". There's a whole lot of people who should have gone to prison over that whole deal, and all they got was a reprimand and maybe had to move down a floor in Manhattan. All of America suffered from their deeds though. There's a part of me that would have really liked to see where the buck finally stopped in that whole deal...because I don't think America got to see who the truly BAD-guys really were! (and if they had, we might have a much different market today).

Oh, and Jeffrey Epstein didn't kill himself.

originally posted by: Flyingclaydisk
a reply to: Edumakated

This is actually what happened during the housing bust. Most of the mortgage companies that failed did so because the secondary market stopped buying the mortgage loans and the mortgage lenders couldn't make any additional loans as their warehouse lines were full. Basically, liquidity dried up.

Well, if you're referring to the 2008 crisis, that's not the worst of it, or even close. In fact, it was only a minor symptom of a much larger disease.

You have to look at "why" the secondary market stopped buying mortgages. And the reason for this was, they couldn't roll all those mortgages into the mystical (and crooked) "derivatives" packages on Wall Street. This is where the whole "toxic debt" phraseology came from. So, they couldn't get out from under the debt either by duping investors thinking they were investing in good debt only to find out it had been laced with all manner of toxic debt. Then, if this wasn't already bad enough, you had the hedge fund market move in and start capitalizing on all these losses by short-selling all these debt package derivatives. (which is why short selling, and or hedge funds, or both, should be either outlawed or made available to ALL investors, which they are not). In essence they were betting on you failing, and "you" in this case was a far larger market share than anyone understood...again, due in large to the whole underworld of derivatives.

So, the financial gymnastics cited in the OP are really just an ongoing CYA battle between the origination market and the underwriting market to cover their asses, create an insurance policy in the form of a legal "out" and make their own investments look safer to investors. This is not to be confused with the "primary" and "secondary" elements of the market. Those markets are risk based. In short, it's "spin" and legal gymnastics geared toward the investment side of the market, not the debtor side of the market.

Honestly, although a bit off-topic, I'm still on the fence about "Too big to fail". There's a whole lot of people who should have gone to prison over that whole deal, and all they got was a reprimand and maybe had to move down a floor in Manhattan. All of America suffered from their deeds though. There's a part of me that would have really liked to see where the buck finally stopped in that whole deal...because I don't think America got to see who the truly BAD-guys really were! (and if they had, we might have a much different market today).

Oh, and Jeffrey Epstein didn't kill himself.

I don't disagree.

From my perspective being on the front lines, banks made a lot of the bad loan (lax underwriting) because there were buyers of the debt. A bank comes in to a mortgage office and says "Hey, if you have any borrowers with 580 FICO scores and no down payments, we will buy that loan..." The loan officer says, "WTF? For real? Ok... so next time that mope who comes through do with a 580 FICO score and no down payment, we can say we got you a mortgage!"

Most of these loans performed because property values kept rising. If the borrower got behind, they could just sell the home. Or they were able to refinance out of the loan.

As property values started stagnating, these loans stopped performing. The secondary investors also started realizing the tranches they were buying were full of these riskier loans and the rating agencies lied about the loan quality.

The other thing that get glossed over all the time is the AMOUNT OF FRAUD in the loans originated. When banks dropped the scrutinization of income and assets, it opened the door to a lot of fraud.

Once the smarter guys on wall street figured out what was going on they most certainly were shorting and do everything else to profit of the collapse.

Yes, banks should not be too big to fail. Wall Street should be a partnership like in the old days. Commercial / mortgage banks should be separate from investment banks. Bank foot prints should be limited in geography like 30 years ago when a commercial bank could not grow beyond a region like the Southeast, etc.

Oh, Epstein didn't kill himself.

a reply to: Edumakated

Agreed, and to truly understand these markets I believe a person needs to understand (to the extent even possible) how "derivatives" work. As debt gets submerged further and further into the market, its original identity becomes murkier and murkier until it is no longer recognized for what it originally was. Derivatives play a central role in this, because they repackage all sorts of things to look like something else. And because they are so complex few understand how they even work, so they're not well regulated at all. In fact, I would posit many professional investors on Wall St. could even provide a comprehensive example of how derivatives work. They might be able to describe what the components are, but not how they work in a macroeconomic sense. Frankly, I'm not sure anyone really knows this answer.

a reply to: Edumakated
Problem is the banks know they can sell these high risk sub prime mortgages so they continue to loan to the entities that are in jeopardy of default. They sell these high risk liabilities to the market players that game this system and are free to make ever more high risk loans to sell. They are buying and selling junk in the hopes of turning huge profits and don't care about the consequences, unless they get burned.

originally posted by: AugustusMasonicus
a reply to: Edumakated

How does this new ruling impact the homeowner?

If you are already the homeowner, it won't. It might make mortgage loans a little harder to get since mortgage aggregators might tighten up on acquiring negotiable instruments if they are non-recourse as against the mortgagees. And not, mortgages are not the objects of the sale. The underlying notes are. The mortgages are simply the instrument securing the notes. Nothing has changed with the court ruling with regard to the liability of the homeowner that signs the note and mortgage. He/she/they are still on the hook.

a reply to: F4guy

It might make mortgage loans a little harder to get

Technically this can lead to a decline in value right? Less lending = less buying or lower aggregate demand?