It has been a while since I have done a blog post. The last month has been busy with changes in at the office, Brian T. Canupp, PSC. In the next few weeks the blog activity will be picking up considerably– except for when the day is just too nice and a trip to Keeneland is in order.
A big part of the rise in bankruptcies and foreclosures has been the collapse in the housing securities market. Once you closed on your house the note you signed started its live as commercial paper. That commercial paper (mortgage, car note, agricultural loan) then began to be bought and sold on the open market. You as a consumer were never aware of this as the place you sent your payment to (the Servicer) always stayed the same.
As the market began to correct itself in 2005 Magnetar became a Wall Street player. Magnetar created investments that were composed of mortgages—very risky mortgages. Magnetar would then sell what it could to other buyers, insure itself (through credit default swaps) on the junk and take all the money to the bank.
Banks, who made the deals with the consumers, would be paid millions (if not billions) of dollars in fees to execute the sales to Magnetar. The individual bankers were making money, Magnetar was making money, and the bank was making short term money. It appears that the insurance policy that Magnetar was taking out was not a fact regularly disclosed to investors.
Now, with hindsight being 20/20 it is clear that these investments were risky and that the people borrowing to purchase a home were seen and the next loan to place in the pipeline and there ability to repay money was not an important consideration. The goal was to not be the company holding the note when the homeowner could not pay the mortgage any longer.
Magnetar, to its credit, was able to lawfully exploit the greed and mania that existed in the mortgage market. It was able to make money on the good quality loans that it purchased and was able to insure itself against losses on the bad stuff. This is the perfect case of having your cake and eating it.
Prior to Magnetar coming onto the market some experts believe that the sales of sub-prime mortgages would have come to a slow stop. However, when Magnetar entered the market the need for additional mortgages, primarily sub-prime mortgages, took off again.
Now that the economy has cycled through many of the “good loans” which were sold to investors like pension funds, mutual funds, and insurance companies, have now defaulted and the home owners associated with the loans are filing bankruptcy or facing foreclosure.
The Magnetar debacle was the subject of a feature story on This American Life and was prepared in conjunction with Pro Publica, a watchdog group. It provides a much more detailed explanation into how the system worked.
Without a doubt each one of us are responsible for our own actions. However, when mortgage borrowers and investors are not provided the entire story it is impossible for them to make informed decisions. The success of this business model was dependent upon the greed of those selling mortgages and selling investments. Now in 2010 the piper is being paid by virtue of increased forclosures and bankruptcy filings.
The pro publica report helps to give context to the environment in which mortgage brokers were selling mortgages between 2005 and 2007. The market was the wild west and there was big money to be made even if the homeowner faced foreclosure or filed bankruptcy.
When we look back on the way business was conducted during this time frame it is becoming more and more clear that, at times, violations of state and federal law occured in getting consumers to take out a mortgage.
If you are facing foreclosure or considering bankruptcy please give me a call or click here. A thorough review of your loan documents may uncover a situation where your rights as a consumer have been violated.
Thank you for reading and please feel free to Comment!