Consumer Shock

When You Can't Trust Bankers
By G.B. Taken

    A lot of folks are anxious over the recent economic downturn and daily news descriptions including the mantra “ since The Great Depression” have many wondering what happened and how we have reached the edge and perhaps soon the abyss. The crisis we are in now is the result of a lack of confidence caused by some really shady business dealings.
    The entire mess began with home loans. These mortgages were not your grandparents’ mortgages; in fact, these loans could not be further from those time-tested and stable transactions. In “the old days” when you went to the bank for a loan it was a local bank that loaned you the money and held your loan. This same bank would have collected the payments on your loan until your mortgage was paid off. The business deal was very basic and straightforward, not like the banking system we have today.

    Bankers have lobbied congress until they got their wish list turned to law. What the law made possible was a financial shell game. A typical loan goes through many hands on the way to the final servicer. The loan may have passed through five entities before you even make your first payment. Your loan has been originated, brokered, warehoused, underwritten and assigned to a servicer.  The process has been made complicated and deceptive on purpose.

    Bad banking policies and low-interest teaser rates lured many people into loans they could not afford. Within the banking system, a lot more was going on than lax regulations and well-marketed deals. There was also an abundance of fraud going on; inflated appraisals, document tampering and other predatory lending practices. Many homeowners were ripped off by “bait and switch” loan offers; the loans they were promised is not the loan they got.

    The problem is further complicated when some Wall Street wizards thought it a good idea to “pool” or bring these loans together into a collective. These loan “pools” or mortgage-backed securities (MBS) were bought by investors and became part of investment and retirement plans.

    There was a lot riding on these loans: homes, investment portfolios, and the credibility of the lending institutions. Once people started defaulting on loans they could not afford and were foreclosed on, this foreclosure depressed the prices of homes in their neighborhood. As foreclosures increase, property prices plunge drastically, causing many mortgages to go “underwater” meaning that the homeowner's mortgage debt is higher than the property value. This has resulted in more and more people abandoning their homes.

    The total devastation that is sweeping through the housing market has exposed the mortgage-backed security (MBS) investments for what they are: a scam. Unfortunately, the damage will be far and wide destroying the retirement plans many have been building for a lifetime.

    There is no trust among the banks because they really do not know how much bad debt they or their associates have within their institutions. This lack of trust has cut off lending to everyone, you, me, businesses, and other banks. This complete shutdown of liquidity or cash has frozen the economy. Consequently, the economy is shrinking meaning that we are in a recession and perhaps a severe and long sustained recession or depression is in our future if the cycle of destruction continues unchecked. Bad things happen when you can't trust bankers.

All content on this site is property of G. B. Taken. All rights reserved January 1, 2010