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.
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property of
G. B. Taken. All rights reserved January 1, 2010