ViewsPaper: January 9, 2008
A CHRONOLOGICAL ORDER OF DISORDER –
MORTGAGES, LOANS, AND PREDATORY LENDING PRACTICES
If there is no struggle, there is no progress... Power concedes nothing without a demand. It never did, and it never will. - Frederick Douglas, 1857
I have been watching the development of uncontrolled and unregulated lending practices over the last few years with growing alarm because the regulatory authorities, whose function is to regulate and control, seem to turn a blind eye to the practical implications and consequences of such economic terrorism that is occurring daily right in our communities.
A glimpse into history gives us some insights as to who is behind all this.
After the Great Depression, Congress passed laws to separate the three biggest industries responsible for the market crash of 1929 and the depression that followed – banking, insurance and securities. In 1968 and 1977, the Fair Housing Act and the Community Reinvestment Act, respectively, were passed by the Congress to help underserved communities have access to credit. Securitization of loans were the order of the day where lenders sold loans to the secondary markets, which packaged them into securities to sell to investors in order to reduce potential risks to the lenders.
In 1980, the Monetary Control Act (MCA) was passed. Interestingly, Section 103(2)(D)(3) of the MCA gives the Federal Reserve authority to drop the Reserve Requirement of banks to zero percent. They are required to maintain a healthy ten percent at all times to prevent a run on the bank (meaning a point in time when every depositor heads to the bank to withdraw all his money. Section 105(2) gives the Fed the authority to monetize U.S. Federal debt, Municipal Bonds, and Foreign Debt.
In 1993, the Glass Steagall Act of 1933 was repealed. There were six quiet years. And in 1999 the Financial Services Modernization Act (FSMA) was passed. The federal government gave its blessings for the consolidation of the banking, insurance, and securities industries, exactly the opposite of that which was prohibited by the 1933 Act. The Gramm-Leach-Bliley Act was also passed in 1999 to regulate certain advisory activities by the Investment Advisors Act of 1940.
The FSMA spawned, obviously, mortgage banking affiliates of depository institutions; independent mortgage banks; insurance companies (remember, insurance companies are NOT subject to federal regulatory control but state regulatory control); and other financial institutions hiding under the umbrella on non-regulatory control.
The drama of the sub-prime loan industry begins with a simple appraisal of the house you intend to buy. Nothing is stopping the loan provider from exerting influence over the appraiser. The next economic terrorist who takes his position in the battle lines is the credit reporting bureaus who determine your credit score. Remember, the marriage between the lender and the credit bureau is solid, strong, and secure – never to be rendered asunder, ever. Then your realtor recommends a lender – an unregulated financial institution. Assuming your credit score is less than 580, and most of the subprime borrowers are margin cases, your interest rate is set at a variable of seven percent – affordable to the borrower with "stated income", meaning no tax return forms like 1099s or 1040s, but just one year’s supply of the borrowers’ bank deposit slips and statements. This is "reverse redlining" in certain lending circles. This is talking the talk and walking the walk of the predatory lender.
So now, the credit reporter determines for the lender the interest rate that would be set. The borrower – you – will usually cough up between ten to fifteen percent of real money and the rest of the loan (which you will never see) is deposited into the seller's account. If fifty million people cough up ten to fifteen percent of the purchase price of the house – say $3,000.00 each, then we have 50,000,000 x $30,000 = $ 1,500,000,000,000, i.e. 1.5 billion dollars in some lender's account. Imagine what will happen to this money as it grows exponentially in a nice asset enhancement program.
The bubble bursts when the borrower is unable to pay his 'monthly mortgage' because lo and behold his variable interest rate pitched in, and now, instead of paying $1800.00 a month, his interest rate is $2700.00 per month, which he can ill afford. So, the house-buyer defaults, and the lender has no choice but to foreclose. But the lender is in the lending business, he is not in the real estate business. The investors want their money, the lender has to satisfy the investor, and when everybody is going broke because they cannot pay their monthly mortgage, somebody has to bail out the lender. The Federal Reserve steps in by flushing more money into the system, and lowers interest rates. The lender gets his money, the investor gets his money. The appraiser has made his fees. The credit reporter has earned his fees. The house inspector has earned his inspection fee. The realtors and attorneys have been paid their fees and commissions.
And you the house-buyer, you have lost your home and house.
The victim – YOUThe culprit – the legislator, the executive, and the judiciary. The legislator who made the laws to encourage predatory lending, the executive who charges the sheriff to evict you from your house, and the judiciary that pronounces you a credit criminal with NO defense to boot.
WELCOME TO AMERICA. Especially those who can afford to be part of this disorder.
Judge Naidu
January 9, 2008
P.S. The law firm O'Melveny & Myers is representing bankrupt subprime lender New Century Financial Corp. A recent article covering the case focused entirely on the firm’s attorney fees based on billable hours instead of telling the reader how the company was reduced to bankruptcy.
Return to the top
"Why do you call me 'Lord, Lord' and do not do what I say?" - Jesus, Luke 6:46