You Can't Trust
A lot of folks are
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.
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.
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
The problem is further complicated when some Wall
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
the homeowner's mortgage debt is higher than the property value. This
has resulted in more and more people abandoning their homes.
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.
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G. B. Taken. All rights reserved January 1, 2010