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By CW Covert, Executive Vice President, National Mortgage Investigation
Once a mortgage note is created, a homeowner starts making monthly installment payments, primarily consisting of interest, with only a small amount being paid towards the home’s principal every month. In fact, on a $200,000 mortgage at 6% interest, the bank makes nearly $60,000 in just the first five years. The homeowner is literally renting the home from the bank in this scenario, because the bank can foreclose if the homeowner can’t pay the note. It’s a treadmill designed to keep the homeowner entrenched and the bank turning a profit. Most of us think that banks are losing billions in the midst of the foreclosure crisis. We tend to believe that banks have more of an incentive to keep a homeowner paying every month than to foreclose on them. Actually, the opposite is true; banks make more by foreclosing on a home than by accepting monthly payments with interest.
Foreclosure is now an industry
In recent years, banks began buying what is known as a Credit Default Swap (CDS) to make massive profits from non-paying homeowners. A credit default swap is literally a bet that a certain loan will fail. These bets are bought for pennies on the dollar by banks and other for-profit corporations. A CDS creates a major “pay day” because it acts like an insurance policy when a homeowner defaults on their mortgage. Why wait for a homeowner to pay off their loan in thirty years when a bank can make a high risk loan designed to fail and then cash a CDS in? It has been revealed that in some cases, banks and other investment firms purchase CDS’s up to 100 times a home’s mortgage value, creating an enormous payout of 100 times the original mortgage balance.
The credit default swap is one explanation as to why loan modifications are being denied so often and why foreclosures are such a profitable occurrence for the banks. When a bank has such an enormous incentive for a homeowner to fail, then why would that bank help the homeowner by modifying their loan? A modified loan interferes with the bigger, more profitable picture. This explains why, for the first time in financial history, banks created mortgages for people who they knew would go into default.
The big bailout of 2008 was made out by the media to be a government play designed to help “ailing” banks who were “losing” billions on foreclosures. It wasn’t. Much of the bailout went to pay off the credit default swaps the banks bought from companies like AIG who sell them. AIG didn’t have enough money to honor all the credit default swaps they sold, so a taxpayer bailout was constructed by Treasury Secretary and former Goldman Sachs CEO, Henry Paulson in the fall of 2008. Goldman Sachs bought enormous amounts of credit default swaps on toxic mortgages they made to low income, low credit borrowers. With enough taxpayer bailout money to pay off companies like Goldman Sachs, AIG sent many of their exec’s on a luxury vacation. The modern foreclosure crisis is, in part, an insurance scam which has caused the largest transfer of wealth in global history. Bankers continue to get the largest salaries and bonuses in banking history; despite the worst housing market in US history. Mission accomplished.
Tax Dollars Reward Lenders
Right after institutional lenders (banks) create mortgages, they often sell them to government sponsored enterprises (GSE’s) such as: the Federal National Mortgage Association (FNMA), nicknamed “Fannie Mae” and/or the Federal Home Loan Mortgage Corporation (FHLMA), also known as “Freddie Mac”. The purpose of both companies is to either buy or guarantee payment of loans made by mortgage lenders. This allows those lenders to stay liquid and make more loans. These mortgages are packaged into Mortgage Backed Securities (MBS) and can be sold to another layer of investors; this process is known as securitization. This process, when used ethically, gives many good borrowers an opportunity to own a home while making sure the banks can continue to lend money to more qualified borrowers. When mortgage securitization is misused however, it can transfer an enormous amount of wealth from homeowners to Wall Street firms.
Michigan Attorney Vanessa Fluker recently testified in front of the House Judiciary Committee in the Mortgage Services and Foreclosure Practices hearings. In her testimony, she reminded the Congressional panel that mortgages guaranteed or underwritten by Fannie Mae or Freddie Mac ensure that banks are paid nearly the full mortgage balance upon foreclosure. Let’s be clear here: the banks don’t get paid the remaining mortgage balance when they foreclose, they get paid 90% of the full original mortgage amount. This is in addition to all the interest the homeowner paid up until the point when they defaulted, the eventual resale price of the home and the monies generated from any credit default swaps bought behind the homeowner’s back. How can foreclosures cease when the rewards for foreclosing are so great for banks?
If you think that’s bad, please remember that Fannie Mae and Freddie Mac are government sponsored enterprises. In other words, every working Americans’ tax dollars fund these companies! On Oct 21, 2010 The Federal Housing Finance Agency (FHFA) estimates revealed that the bailout of Freddie Mac and Fannie Mae will likely cost taxpayers a total of $224–360 billion, with over $150 billion already provided. This money is used to pay the banks that refuse to help homeowners.
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