Understanding the sub-prime mortgage scandal.
Many developing nations are in debt, and poverty, partly due to the policies of international institutions such as the International Monetary Fund (IMF) and the World Bank. Their programs have been heavily criticized for many years for resulting in poverty. In addition, for developing or third world countries, there has been an increased dependency on the richer nations. This is despite the IMF and World Bank’s claim that they will reduce poverty. Here in the U.S., the IMF was behind the mortgage crisis all the way!
There is nothing inherently wrong or reckless about lending to borrowers with lower incomes, and lower credit scores. But good judgement dictates that in making sub prime loans, lenders must control the risks by closely evaluating the borrower, setting standards for collateral, and charging rates proportional with the greater risks....unless the idea was the fleecing and displacement of citizens from the beginning!? A high percentage of these sub-prime mortgages, over 90% in 2006 for example, were A.R.M's! The IMF's policy of structural adjustment is partially the blame. People want to blame the average Joe for taking out a mortgage he ultimately could not afford, consider this.....
You have a global pool of money which consists of all of the worlds savings...companies, countries, people etc. The bankers want to invest this money for the best amount of profit for the least risk. In 2000, this amount of money was close to 36 trillion after adding up for many years. In just 6 years in 2006 it doubled to about 70 trillion! This was unprecedented and was because of the poorer countries starting to make money through savings, investments, etc. The world bankers were making a ton of money as a result of this, and because of their greed, needed to re-invest to make more. Their money doubled so fast that the good investments didn't have time to keep up, so consequently, there weren't enough good places to invest. U.S. treasury bonds were one of the investments that the bankers loved, but Alan Greenspan kept the interest rates so low that the bankers could not get the returns that they wanted, so they turned to mortgages where they could get 4, 5, 6, 8 % etc. returns on their money. Thirty years of data proved that this would be a great source of money for the bankers because people were paying their mortgages.
But, being the greedy parasites that they are, the bankers wanted more, so a scandalous system was developed to get people's mortgages into the hands of the big bankers. This is how it worked. Joe Blow makes a deal with a mortgage broker, who then sells the loan to a bank, who in turn sells it to an investment firm on Wall street like Morgan Stanley, Bear Stearns, or whoever. Finally the Wall street firm puts this mortgage in a pile with a thousand other mortgages, and sells shares of them back to the world bankers who control that global pool of money I mentioned earlier! This worked so well that the mortgage brokers started running out of people who wanted mortgages! So guess what they did! Out of total greed, the bankers had the mortgage brokers relax the standards and requirements of who could take out mortgage loans! Traditionally you needed a decent credit score, and money in the bank to get a mortgage loan. The sub-prime mortgage crisis was caused because they began to loan money out to people with no jobs, no credit, and no money! Meanwhile, everyone in every link of this chain was making HUGE money!
Everything went great until enough people's bills became due that could not pay them. This is when the crisis started. People stopped paying their mortgages. Now the world bankers with their pool of money ceased all investments, which killed Bear Stearns, Washington mutual, etc. The mortgage brokers were involved with writing up deals that were criminal! Do you blame the guy who had a dream of home ownership who was lied to and told that he could be put into an affordable mortgage situation? They cooked the books to make the numbers look good, but it was all a scam for fast money, and eventual displacement! Many people have lost their homes at this point! As of right now, most can't qualify for a home loan. I recently was told of a doctor with a mid 800 credit score, who could not qualify because of a glitch in an automatic payment!
So now who are buying up all the homes? The Canadians, and Chinese are the top two mortgage investors in the United States! All this while Americans are losing their homes and being displaced at the hands of unscrupulous individuals! Can you say "third world country'? The well-to-do Chinese investors, who are limited in their own country in terms of investments, are buying up many, many properties, sitting on them, or renting them out. They often buy a property and jack up the rent many times displacing the individual.
Now lets talk derivatives. If you really want to know what is going to sink the global economy, many financial experts, and economists say "look to derivatives". No less an expert than Warren Buffet has been warning us about derivatives for years. They type of derivative he speaks about is the big business kind that is sold by large international banks to their corporate customers. These derivatives are loosely monitored by regulators like the Federal reserve. But a whole different derivative market has grown up supposedly under the radar of monitors and is doing a very good job of undermining the U.S. economy all on it's own! I am speaking of the unregulated, out of control derivatives that infested the home mortgage market in recent years. You read about them...mortgages with teaser rates, no interest payments, negative amortization, and so forth. If you did not know that these were derivatives, join the crowd because the people selling them didn't know either, much less the poor souls buying them! And therein lies the problem.
Just to keep things straight, a derivative is a financial contract which derives it's value from some other more basic, and traditional financial contract. A derivative is typically a swap of one interest rate payment for another over a fixed period of time, or a swap of one asset for another. Another form of derivative would be an option...the right of the buyer to purchase or sell some basic financial contract on a future date at a predetermined price. The basic financial contract that underlies the derivative can be any traditional instrument such as a deposit, commodity transaction, foreign exchange deal, or equity purchase.
In the mortgage business, the traditional financial contract is the 30-year, fixed rate mortgage payable in monthly installments. Principle payments as a percentage of the monthly payments start out very small in the life of the mortgage, but towards the end almost all of the monthly payment goes towards paying the principle rather than interest. Banks which sell this product do not usually hedge their cash flows by buying a 30-year fixed rate mortgage to match all inflows and outflows exactly. What they do is short-fund the mortgage by issuing short term deposits to hedge their mortgage portfolios.
With the vast amount of options involved in the derivative market, one can begin to see the problem. Only a hand full of the very large banks were able to properly value all of the different options related to this unscrupulous market! A.R.M's, teaser rates, interest hikes for not accepting teaser rates, penalty clauses.....the list is long! Most of these mortgages, as soon as they were booked, were sold by the banks as securities to investors who knew even less about the option risks, and were fooled by the AAA ratings on the securities thinking they were as risk-free as U.S. Treasuries!
In steps the media. The very nature of the mortgage problem being described as a "sub-prime credit crisis" implied that mostly poor Black and Hispanic homeowners were/are the majority defaulters on their mortgages, with their homes entering into foreclosure. That is an element of what occurred, but it is obviously not just Blacks and Hispanics, and... it is also a residual effect of something more sinister...the systematic abuse of derivatives by mortgage banks and brokers, and the Wall Street investment banks which packaged and sold the securities!
It is interesting to me that because primarily due to ignorance, and the media, I hear people saying things like..."these people should never have taken out these mortgages in the first place"! Or..."they knew that they would not be able to make the payments, what made them think they could buy a house in the anyway"? This crisis really has nothing to do with the segment of the market that was lured into thinking they could be a part of the "American Dream" of home ownership. It has everything to do with how these options were sold, and the degree of ignorance that was on display about the risks of derivatives across the board!
So, the next time you want to blame your neighbor for causing the sub-prime mortgage crisis, you may want to switch some of that blame to the parasite world bankers who control the flow of money!
Many developing nations are in debt, and poverty, partly due to the policies of international institutions such as the International Monetary Fund (IMF) and the World Bank. Their programs have been heavily criticized for many years for resulting in poverty. In addition, for developing or third world countries, there has been an increased dependency on the richer nations. This is despite the IMF and World Bank’s claim that they will reduce poverty. Here in the U.S., the IMF was behind the mortgage crisis all the way!
There is nothing inherently wrong or reckless about lending to borrowers with lower incomes, and lower credit scores. But good judgement dictates that in making sub prime loans, lenders must control the risks by closely evaluating the borrower, setting standards for collateral, and charging rates proportional with the greater risks....unless the idea was the fleecing and displacement of citizens from the beginning!? A high percentage of these sub-prime mortgages, over 90% in 2006 for example, were A.R.M's! The IMF's policy of structural adjustment is partially the blame. People want to blame the average Joe for taking out a mortgage he ultimately could not afford, consider this.....
You have a global pool of money which consists of all of the worlds savings...companies, countries, people etc. The bankers want to invest this money for the best amount of profit for the least risk. In 2000, this amount of money was close to 36 trillion after adding up for many years. In just 6 years in 2006 it doubled to about 70 trillion! This was unprecedented and was because of the poorer countries starting to make money through savings, investments, etc. The world bankers were making a ton of money as a result of this, and because of their greed, needed to re-invest to make more. Their money doubled so fast that the good investments didn't have time to keep up, so consequently, there weren't enough good places to invest. U.S. treasury bonds were one of the investments that the bankers loved, but Alan Greenspan kept the interest rates so low that the bankers could not get the returns that they wanted, so they turned to mortgages where they could get 4, 5, 6, 8 % etc. returns on their money. Thirty years of data proved that this would be a great source of money for the bankers because people were paying their mortgages.
But, being the greedy parasites that they are, the bankers wanted more, so a scandalous system was developed to get people's mortgages into the hands of the big bankers. This is how it worked. Joe Blow makes a deal with a mortgage broker, who then sells the loan to a bank, who in turn sells it to an investment firm on Wall street like Morgan Stanley, Bear Stearns, or whoever. Finally the Wall street firm puts this mortgage in a pile with a thousand other mortgages, and sells shares of them back to the world bankers who control that global pool of money I mentioned earlier! This worked so well that the mortgage brokers started running out of people who wanted mortgages! So guess what they did! Out of total greed, the bankers had the mortgage brokers relax the standards and requirements of who could take out mortgage loans! Traditionally you needed a decent credit score, and money in the bank to get a mortgage loan. The sub-prime mortgage crisis was caused because they began to loan money out to people with no jobs, no credit, and no money! Meanwhile, everyone in every link of this chain was making HUGE money!
Everything went great until enough people's bills became due that could not pay them. This is when the crisis started. People stopped paying their mortgages. Now the world bankers with their pool of money ceased all investments, which killed Bear Stearns, Washington mutual, etc. The mortgage brokers were involved with writing up deals that were criminal! Do you blame the guy who had a dream of home ownership who was lied to and told that he could be put into an affordable mortgage situation? They cooked the books to make the numbers look good, but it was all a scam for fast money, and eventual displacement! Many people have lost their homes at this point! As of right now, most can't qualify for a home loan. I recently was told of a doctor with a mid 800 credit score, who could not qualify because of a glitch in an automatic payment!
So now who are buying up all the homes? The Canadians, and Chinese are the top two mortgage investors in the United States! All this while Americans are losing their homes and being displaced at the hands of unscrupulous individuals! Can you say "third world country'? The well-to-do Chinese investors, who are limited in their own country in terms of investments, are buying up many, many properties, sitting on them, or renting them out. They often buy a property and jack up the rent many times displacing the individual.
Now lets talk derivatives. If you really want to know what is going to sink the global economy, many financial experts, and economists say "look to derivatives". No less an expert than Warren Buffet has been warning us about derivatives for years. They type of derivative he speaks about is the big business kind that is sold by large international banks to their corporate customers. These derivatives are loosely monitored by regulators like the Federal reserve. But a whole different derivative market has grown up supposedly under the radar of monitors and is doing a very good job of undermining the U.S. economy all on it's own! I am speaking of the unregulated, out of control derivatives that infested the home mortgage market in recent years. You read about them...mortgages with teaser rates, no interest payments, negative amortization, and so forth. If you did not know that these were derivatives, join the crowd because the people selling them didn't know either, much less the poor souls buying them! And therein lies the problem.
Just to keep things straight, a derivative is a financial contract which derives it's value from some other more basic, and traditional financial contract. A derivative is typically a swap of one interest rate payment for another over a fixed period of time, or a swap of one asset for another. Another form of derivative would be an option...the right of the buyer to purchase or sell some basic financial contract on a future date at a predetermined price. The basic financial contract that underlies the derivative can be any traditional instrument such as a deposit, commodity transaction, foreign exchange deal, or equity purchase.
In the mortgage business, the traditional financial contract is the 30-year, fixed rate mortgage payable in monthly installments. Principle payments as a percentage of the monthly payments start out very small in the life of the mortgage, but towards the end almost all of the monthly payment goes towards paying the principle rather than interest. Banks which sell this product do not usually hedge their cash flows by buying a 30-year fixed rate mortgage to match all inflows and outflows exactly. What they do is short-fund the mortgage by issuing short term deposits to hedge their mortgage portfolios.
With the vast amount of options involved in the derivative market, one can begin to see the problem. Only a hand full of the very large banks were able to properly value all of the different options related to this unscrupulous market! A.R.M's, teaser rates, interest hikes for not accepting teaser rates, penalty clauses.....the list is long! Most of these mortgages, as soon as they were booked, were sold by the banks as securities to investors who knew even less about the option risks, and were fooled by the AAA ratings on the securities thinking they were as risk-free as U.S. Treasuries!
In steps the media. The very nature of the mortgage problem being described as a "sub-prime credit crisis" implied that mostly poor Black and Hispanic homeowners were/are the majority defaulters on their mortgages, with their homes entering into foreclosure. That is an element of what occurred, but it is obviously not just Blacks and Hispanics, and... it is also a residual effect of something more sinister...the systematic abuse of derivatives by mortgage banks and brokers, and the Wall Street investment banks which packaged and sold the securities!
It is interesting to me that because primarily due to ignorance, and the media, I hear people saying things like..."these people should never have taken out these mortgages in the first place"! Or..."they knew that they would not be able to make the payments, what made them think they could buy a house in the anyway"? This crisis really has nothing to do with the segment of the market that was lured into thinking they could be a part of the "American Dream" of home ownership. It has everything to do with how these options were sold, and the degree of ignorance that was on display about the risks of derivatives across the board!
So, the next time you want to blame your neighbor for causing the sub-prime mortgage crisis, you may want to switch some of that blame to the parasite world bankers who control the flow of money!
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