"This Is The Craziest Mortgage Scheme I've Ever Seen"

Tyler Durden's picture

Authored by Simon Black via SovereignMan.com,

The Great Financial Crisis happened because Wall Street was financing homes for people who couldn’t afford them.

Leading up to the GFC, there was a voracious appetite from investors for “AAA”-rated mortgage debt. So lenders would make lots of loans to subprime borrowers and sell them to Wall Street. Wall Street would pool them together and one of the major ratings agencies (like Moody’s or Standard & Poor’s) would stamp the steaming pile of garbage with AAA.

AAA by Moody’s definition means the investment “should survive the equivalent of the U.S. Great Depression.” In other words, it’s rock solid.

The reasoning was that one subprime mortgage was risky. But if you bundled thousands together, you get AAA… Because they couldn’t all go bad at once. And, hey, you can’t lose money in real estate.

The rating agencies weren’t as dumb as they appeared, though… Investigations following the crisis showed lots of incriminating emails, like this one from a Standard & Poor’s exec:

“Lord help our fucking scam . . . this has to be the stupidest place I have worked at.”

Like everyone else, they played along because they wanted to make money.

To generate enough mortgages to meet demand, lenders would do anything…

– Sell a house for no money down

 

– Offer a teaser rate (which temporarily reduces monthly payments, then jumps to market rates)

 

– And even offer to pay part of your mortgage for a couple months (most small lenders could sell a loan to Wall Street in a month or two, erasing their liability. If the origination payment was more than cash out of pocket, they still came out ahead).

They called the worst of the subprime loans “NINJAs” as in “No income, No job, No assets.”

When they couldn’t actually write enough mortgages to meet demand, Wall Street got creative. They started bundling together bundles of mortgages, something called a CDO-Squared. Then they created synthetic CDOs, which were just derivatives of subprime mortgages and even other CDOs (essentially a
way for people to gamble on the mortgage market without actual mortgages).

As we all know, it ended in disaster… because the people who took out the mortgages they couldn’t afford to buy overpriced homes stopped paying. And the CDOs, CDOs-squared and synthetic CDOs (which had been spread around the world) went bust.

Remember, it all started with selling people homes they couldn’t afford.

Which brings me to today…

There’s a record high $1.4 trillion of student debt in the US. And millennials are struggling to pay off those balances.

The National Association of Realtors polled 2,000 millennials between the ages of 22-35 about student debt and homeownership… Only 20% of those surveyed owned a home… Of the 8 in 10 that didn’t own, 83% of them said student debt was the reason. And 84% said they’d have to delay a home purchase for years (seven years being the median response).

And that’s all bad for the home-selling business. Once again, the lenders are getting creative…

Miami-based homebuilder, Lennar Homes, recently announced it would pay a big chunk of a student loan for any borrower buying a home from them.

Through its subsidiary Eagle Home Mortgage, the company will make a payment to a buyer’s student loans of as much as 3% of the purchase price, up to $13,000.

Debt has become such a keystone of our society, that the only way we can afford something is to swap one type of debt they can’t afford with another type of debt.

A recent study by the Pew Charitable Trust showed 41% of US households have less than $2,000 in savings – a full one-third have zero savings (including 1 in 10 families with over $100,000 in income). Another study showed 70% of Americans have less than $1,000 in savings.

The point is, America is broke… A single, surprise expense like a flat tire or a doctor’s visit would wipe most people out.

And it’s only getting worse.

Back in August, I calculated the average household account at Bank of America (which has $592 billion in consumer deposits from 46 million households)… It’s only $12,870 per household… And that includes savings, investments, retirement… EVERYTHING.

Also keep in mind, that’s the average… So accountholders with huge balances skew the numbers higher.

It’s no wonder Americans have $1.021 trillion in credit card debt – the most in history.

Auto loans are also at a record high $1.2 trillion.

And let’s not forget the US government, which is in the hole more than $20 trillion. The US’ debt is now 104% of GDP… And total debt has grown 48% since 2010.

The liability side of the balance sheet keeps expanding. Meanwhile assets and productivity aren’t keeping up.

But people continue buying homes, cars, TVs and college educations by taking on more and more debt… And now, by swapping one type of debt for another.

Wealth is built on savings and production. Not on playing tricks with paper and going deeper into debt.

I can’t tell when this house of cards falls. But rest assured, it will come tumbling down.

Will you be ready when it does?

Do you have a Plan B?

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JibjeResearch's picture

Hay... those students have one shackle, now put the second shackle...  it doesn't change their situation...

What to lose.... right?

 

Bawwahahahahahahahah

sickavme's picture

Bullshit, the WHOLE economy is so out of control that now there is no one left that can actually afford a home or college or a car....

 

It's not JUST ONE segment. The housing blow up just poked a hole into the rotting corpse and now everyone is trying to patch that hole while also poking holes in it elsewhere....

Stuck on Zero's picture

Simon Black forgot to mention that backstopping all the mortgages was AIG and the re-insurance industry. AIG guaranteed the performance of everything. Unfortunately no-one was backstopping AIG.

YUNOSELL's picture

The US citizens were backstopping AIG at gunpoint with bailout money that will all translate in massive losses in future purchasing power

MANvsMACHINE's picture

What do you mean by 'no one was backstopping AIG?"

You and I were.

Nobodys Home's picture

Me too! I was too! Don't forget me.

Delving Eye's picture

I read shekl for shackle. Same outcome.

HRClinton's picture

(((They))) are getting increasingly desperate, to keep the fiat Debt and fiat currency Ponzi going.

"Keep up the stocks!  Raise the Debt!  Keep up the VOM*!"

   * Velocity of Money

UndergroundPost's picture

Lots to lose. At least the student debt won't increase & payments can be deferred for various reasons. But when that beautiful  shiney home crashes in value, now the sucker-student is swimming in two oceans of debt. 

JibjeResearch's picture

No worry... the bankster will CDO those debts and pitch it to the Fed/State/Local Pensions ...

Life will be great................................ for the top 10%

BAwwwahahhahahahahaha

messystateofaffairs's picture

You gotta love it, at least this one wasn't a hypocrite.

“Lord help our fucking scam . . . this has to be the stupidest place I have worked at.”

TylerDurden6mil's picture

That is the one white guy in a sea of joos and browns.

Crazy Or Not's picture

just wait for the crash that comes after it!

Now THAT will be crazy!

Nameshavebeenchangedtoprotecttheinnocent's picture

The US needs to let all the people out of jail that are there on pot charges & replace them with bankers

and lawyers

and Hillary

and the Podestas

and the rest of the Deep State.......

 

whatswhat1@yahoo.com's picture

If I were up 'shits creek without a paddle', I'd ASSume as much debt as the fools would lend. 

My response to 'Why?' during default would be, "what difference does it make anyway?"

Nobodys Home's picture

At the hearing you could wear one of those team shirts where they print your name on the back. Ben Ghazi.

edit: I had one I wore back in the day as a musician. Ben Dover.

Frodobaggins's picture

When you're a foot under water, what's another inch?

warpigs's picture

I work in the residential lending space. Full retard products are being thought up left and right. Most just are not on the table yet for consumers to leverage.

 

Wash, rinse, repeat...

a Smudge by any other name's picture

I was a carpenter for about half my adult life. But let's say I was conservative to the point of conscious ignorance of investments (they are ungodly).

When I heard that at one point any idiot could get a mortgage I regretted not having jumped in and started flipping.

I could position for a crash and jump in fast. Do you figure this opportunity will arise again?

Nobodys Home's picture

Of course it will! That's why I'm waiting to trade a couple ounces for a city block!

Now that would be silly to think. I'm just kidding. I'm thinking 5 oz for a cabin on the lake.

Swamidon's picture

The Center cannot hold with so many leeches hanging on.  The smartest thing any Melinnial who can get credit can do is to max it out and forget about it.  Without Assets you have no liability (not way for the suckers to collect) so eat, drink and be merry for it'll all collapse very soon, and a good credit rating is nothing you need then, or now.

a Smudge by any other name's picture

As Martin says, it's not debt if you have no intention of paying it back. However to expect some kind of blanket absolution is mistaking the system. It's designed to extract EVERYTHING.

Kendle C's picture

The big boys have theirs. Good idea, why not stealthily purchase silver and gold coins on credit, anything else that will be fungible when the fat lady takes a huge shit on the American Dream. Be sure to cover your tracks because you can be sure an army of Snidely Whiplashes will come out of the woodwork.

Socratic Dog's picture

The beauty of stacking.  No one can know for sure you've got it.  Boating accidents and all.  Load up on debt, cash it out in bullion.

madmax1965's picture

No shit!  This entire mess is built on debt! 

DontWorry's picture

the next real financial crisis will be the last one

davealex's picture

No, no, no. It swaps student loan debt (which cannot be discharged through bankruptcy) for mortgage debt (which can be discharged through foreclosure). It's fucking brilliant.

ToSoft4Truth's picture

Hell yea.  If the interest over the first year is less than the 13K max toward school loans, it would be wise to buy and flip a house annually. 

Nobodys Home's picture

I have a new product for you all to jump on.

ICE-T = Inner City Equity Tranche.

Eberybuhduddy isaba okbuh to buybuh house! (said like the mumbly guy on the Fat Albert show.)

AncientAviator's picture

I have been debt free since 1995. And I am NOT among the super wealthy. I adhered to old school principles. First, I saved. Then I put down as much as I could for as long as I could and paid back my home loan as soon as I could.

I live within my means, never spending more than I make and even in retirement, saving saving saving and of course investing in interest bearing stocks.

Never bought a new car. I let some sucker take the hit and then I bought the car after all the bugs had been worked out of it.

I NEVER tried to keep up with the Joneses because the Joneses were broke.

For generations we borrowed from within the family to build familial wealth. Why make bankers rich? Of course there’s more to the formula but you get my drift. My best friends are in the trades, my happiest friends are in the trades.

Many Americans have lost their way, and they and America WILL atone.

yellowsub's picture

The problem is millions of Americans pay the minimum balance...  

haruspicio's picture

Well done. I did pretty much the same thing. I paid off the mortgage by age 40, paid cash for my kids' college, lived well within my means and saved a lot. Good job because I lost my job at age 54 and took early retirement. Having a few million in savings comes in handy when you lose your job or want to retire early.

Ruup2It's picture

Short Lannar... Check.. And get the face ripped off since we live in bizarre’o world!

illuminatus's picture

Remember the printing press boys and girls. As long as they keep cranking it's to infinity and beyond for all assets. The cerntral bankers of course will tell you there is no inflation and they are actually trying to bring it up to 2%. Of course they will also supress all commodities and especially the PMs. Up up and away!

idontcare's picture

If Leonard were still alive, he'd chew his son out for this nonsense (he was a really decent man and his wife, Susan, was a really cool lady as well).  

Mazzy's picture

It's going to be awesome when brokedicks scrounging to get by find themselves with a plumbing leak one day or their HVAC system keels over.  Was it an "unplanned" expense? 

Here's the thing brokedicks of America: plan for it.  Aren't most people adults?  Why don't you have savings?  Savings = OPTIONS.

SybilDefense's picture

Who puts money into a savings account when the stawks market is so wonderful.  All my savings is in bitcoins and fang stawks. I'm gonna be rich rich rich someday!  Bigly!  Thank you Janet for the perfect world, but can I ask you one thing?  Why is it that you want inflation to go up?  Isn't it better for the people you serve for prices to not go up?  Of course I won't care because I'm gonna be rich rich rich (oh, I said that already).  Today I think I will get a 3rd mortgage and buy moar stawks.  Happy days are here again!

Muppet's picture

Guy borrowed $2M from eTrade bank to build a home but only paid out  $1.2M.  Used the rest to make the loan payments and property taxes.   Free living until the he ran out and eTrade bank took it back.  Bank sold in the $800s.   Money has become meaningless.

Gatto's picture

Sounds like a great way to make a debt you can't escape into one that you CAN escape!   Payoof off my student loans and I'll buy your house, then declare bankruptcy, and student loan is gone, at least $13,000 of it!  Maybe do this multiple times until it's all paid, then file!

Dr_Snooz's picture

We are at the end stage of a debt-based monetary system. All the gold bugs want you to believe that this is because we have a fiat system backed by nothing. The reality, however, is that we have a system backed by debt. Every debt-backed monetary system eventually comes to this point: the bankers own all the assets and everyone else is left with only debt.

What happens now? Either we have a debt jubilee, set all accounts to zero and move forward OR we have a violent revolution. Anyone want to put on odds on what path we'll choose?

Demon Slayer's picture

I was deep in the higher end mortgage business working with wholsale pricing with CITI, B of A, and many others during those years. I never had a customer default on any of the, but the quote at the beginning of this article is not factual :

"They called the worst of the subprime loans “NINJAs” as in “No income, No job, No assets.”"

To be accurate the NINJA'S WERE "NO INCOME VERIFICATION, NO JOB VERFICATION, NO JOB VERFICATION"

The interesting thing is that when I started in that business, it was 20% down (or equity), verfication of everything including verfication of deposits, to assure cash reserves were there in case of a job change or other issue that may have come up, and I was refinancing a ton of people with 9% interest rates, and they were happy as bearded clams with their new lower home loan payments.. That was around 1989, 1990.

Demon Slayer's picture

I was deep in the higher end mortgage business working with wholsale pricing with CITI, B of A, and many others during those years. I never had a customer default on any of the, but the quote at the beginning of this article is not factual :

"They called the worst of the subprime loans “NINJAs” as in “No income, No job, No assets.”"

To be accurate the NINJA'S WERE "NO INCOME VERIFICATION, NO JOB VERFICATION, NO JOB VERFICATION"

The interesting thing is that when I started in that business, it was 20% down (or equity), verfication of everything including verfication of deposits, to assure cash reserves were there in case of a job change or other issue that may have come up, and I was refinancing a ton of people with 9% interest rates, and they were happy as bearded clams with their new lower home loan payments.. That was around 1989, 1990.

vegan's picture

IIUC, bankruptcy will not wipe-out student debt, but can wipe out mortgage debt on a primary residence.

That's a win-win!

Pay down a portion of debt that can't be absolved in a bankruptcy, in exchange for debt on place to live which can be absolved in a bankruptcy.

What could go wrong...?

Drop-Hammer's picture

Two words-- Get the f*ck out of jew debt.