Banks made loans to people who could not afford to pay them. This did many things for the banks. Follow the math:
I’ll give you a home price of $100. This is just for easy math, and so we can go from dollars to percentage points and back.
So, there really was no news about NINJA (no income, no job no assets) loans back in 2006 when things were flying high. This kind of activity really did not come to light until the credit crisis evolved.
The banks were able to falsely inflate the value of a $100 house to $200. They did this by creating an artificial demand; a demand which would not exist unless people were being given loans which they really did not deserve.
So, along comes a homebuyer. The homebuyer pays 5% down for the $200 home, then proceeds to pay 6…5% interest for 3 years. The credit freeze occurs, the home price falls to the appropriate value of $100, then the buyer defaults. The bank then, thanks to stricter lending standards requires a 10% down payment, and again, gets somewhere in the neighborhood of 6.5% interest for the next two years.
So, right around 2010 or 2011, this is how this played out:
First buyers down payment (5% of $200) $10
First buyer’s 6.5 % interest on $200 for 3 years $39
Second buyer’s down payment (10% of $100) $10
Second buyer’s 6.5% interest on $100 for 3 years $13
In 5 years time, 72% of the buildings value has been recaptured without considering principal balance. That’s 14.4% annual return. Not bad considering the federal discount rate has been hovering between 0.5% and 0.75%.
Please also consider that at this point, the principal balance has only been paid down 2.25%.
Also realize that the $72 presents a tax burden to the bank, but the wealth (97.75%) ownership of the building does not present a tax concern.
In some states, the bank has full recourse and can sue the original buyer for the remaining $100. In no recourse states, the bank has full recourse to sue the original buyer for the remaining $100 if the mortgage was refinanced (let’s say to add a $50,000 kitchen.)
Further, there were probably garbage fees that the bank charged on all transactions. The bank probably had money in an escrow account for taxes and insurance and the original note was probably insured against default by someone like AIG, who was bailed out by the American Taxpayer.
I would argue that many, many people are not defaulting on their loans because of a loss of income; they are performing strategic defaults because it makes absolutely no sense to be a lifelong debt slave for a mortgage that is twice that of every other mortgage in the neighborhood.
Legislation is being put in place to pretend to try to resolve this situation but the number of people who actually benefit from these programs is so low that these so-called foreclosure prevention measures amount to a charade considering that they are statistically insignificant.
I don’t claim to know absolutely everything about all aspects of the preceding transactions. I do know enough to realize when an enormous wealth swindle has taken place, possibly the largest one in the history of the world.
If, after half an hour, you haven’t figured out who the patsy is, then you’re the patsy
-Warren Buffett