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Saturday, December 22, 2007

Liars into Victims...The New Narrative of the Mortgage Crisis

In these very pages, a while back I said this about the continuing narrative of the mortgage crisis.

I have been disappointed if not surprised by the media coverage of the sub prime crisis. It has been filled with political correctness, condescending nebulous terms that even mortgage brokers don't understand, and very short on any analysis that let's the people know what happened....the mainstream media would have you believe that evil mortgage brokers committed fraud on unsuspecting banks while innocent poor people stood by helplessly and put themselves in an untenable position that they had no control over.

Well, two new articles have done nothing to change this narrative. Let's look first at this from ABC News

"Donna Pearce is one of those homeowners struggling to keep her life from unraveling. She is already four months behind on her high-interest loans from New Century Financial.She says New Century, now bankrupt, got her the loans by lying about her income."After all of this blew up in my face, I realized that they falsified myincome," said Pearce, a 53-year-old nanny who earns $2,100 a month in Connecticut. "It stated that I made way more than I actually make."How much more? Pearce showed ABC News loan application documents thatlisted her income as $5,500 a month."You cannot write a loan like this without knowing that absolutely thisperson is going to fall behind," said Pearce.
This story is about those dreaded STATED LOANS. The story makes it seem as though the borrower was helplessly looking on unable to do anything while loans were created that they couldn't afford. How could someone get into a loan where the income stated is $5100 when they really made $2100 a month? Could this really done without their approval? Here is what I said about the situation.

The borrower is not without fault by a long shot. While the bank may think the janitor makes sixty thousand a year, the janitor knows what he makes. He know sif the mortgage payment is eating up to sixty percent of his monthly income. Ifthis person goes ahead and accepts the loan anyway, is it really the fault of the mortgage broker when they go bad on it.
While Ms. Pearce makes it seem as though she was just an innocent victim, she actually signed several pieces of documentation attesting that the income reported on the application was in fact real. Furthermore, initial disclosures and final disclosures clearly laid out the payment involved. Why would she agree to the loan if she couldn't afford it? Most likely it is because the house she bought she just had to have and she convinced herself that she could. When it went bad, she blamed the evil, evil mortgage broker even though she was an active and willing participant in the fraud.Then there is this,

Chanting, “Sharks bite, ACORN fights – predatory lenders, you’re notright,” dozens of ACORN members on Sept. 26 stormed the offices of Ocwen Financial, demanding that one of the nation’s largest servicers of subprime mortgages modify those loans to keep families from losing their homes. Ocwen CEO William Erbey had ignored a July letter from Florida ACORN requesting a meeting, so members paid him a visit at work. Among the ACORN members were Olga and Paul Gant of Broward County, who told the Palm Beach Post they are facing foreclosure after their monthly mortgage payments jumped from $2,200 to $3,000 per month.

ACORN is demanding that Ocwen enact a moratorium on foreclosures, modify loans according to borrowers’ ability to repay and lock in interest rates at pre-adjustment levels.Similar demands were made in San Jose, Calif., at the offices ofCountrywide Financial, where scores of ACORN members gathered to protest thatcompany’s failure to work out loan modifications with homeowners. ACORNestimates 1.8 million adjustable rate mortgages worth $900 billion will reset athigher, unaffordable interest rates over the next two years. As many as 2 million families nationwide are in danger of losing their homes.

Let's state some obvious things. Mortgages closing documents are contracts. The term of the contract is laid out within the closing documents. ACORN would like the bank to disregard the contract simply because the people who agreed to make the payment now can't make the payment. Even though the fact that these mortgage are adjustable, meaning they can change, was laid out in the closing documents, ACORN wants the bank to just disregard that little tidbit now that it has come back to bite consumers who went ahead and signed anyway.

Isn't that nice? Let's sign a contract, and if we can't live up to the terms, we will just get the other party to agree to new terms. If the other party doesn't agree, then there will be all sorts of populist groups and media right there to make sure to demonize them.

What is the practical effect of all of this? Well, if Ocwen et al goes ahead and redoes all of these loans so that they become affordable, then they will lose more money on those loans. If Ocwen thought that redoing the loans rather than taking the property was the most cost effective, they would have already done it. If they lose even more money, then of course, they will need to make it up with all of their other loans, and thus, it will be the next batch of hopefully good borrowers that will have to pay with higher rates. Of course, no one will see it and no one will report it, so no one will know. It seems that ACORN thinks that contracts can be broken when one side can't live up to them with absolutely no negative consequences. Too bad reality doesn't actually work that way.

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