Morgan Stanley – It’s Big Part in the Great Housing/Mortgage Crisis

Posted on December 22nd, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Where does the blame for the mortgage and housing crisis lie? That is the big debate still raging. I receive hundreds of emails each week and a year ago everyone blamed the home owner.  Now after two years of constant lies and discovery, things have changed considerably.

Most are finally coming around to understand the truth — that the greater housing and mortgage crisis is not a result of millions of borrowers going wild, buying beyond their means blinded by greed.  Nor was it caused by some massive consumer driven multi-year mortgage fraud era where everyone lied to buy a home.  Gangs of mortgage brokers who cruised the streets with loan applications and pens in hand recruiting straw buyers to steal homes didn’t cause it either.  And before you even think it…SHORT SELLERS ARE TO TO BLAME EITHER. This crisis was caused by fraud alright – but not by the consumer or loan officer to any great degree.

The greatest real estate bubble of all time was only able to occur because of the unregulated investment and commercial banks’ insatiable thirst for parts for their Frankenstein securities.  As parts ran low when housing stretched or interest rates rose to levels that made the asset class unaffordable every few months, the constant re-engineering of loan programs focusing on low monthly payments and the elimination of income and assets as a variable brought affordability back in check. This continually repeated for years until virtually anyone with a heartbeat and a hand needed to sign the loan documents were active participants in the market. By turning a blind eye, regulators endorsed their actions.

The extraordinary leverage created through these exotic loan programs and easy credit given to anyone and everyone never existed before and never will again.  Now house prices are simply adjusting to the affordability present given the leverage available through current mortgage finance, rents, interest rates, macro-economic conditions and sentiment. The air pocket under house prices created by the high-leverage and easy credit is simply being deflated.  Home prices will overshoot due to the massive supply created through foreclosures, from the builders and from folks just wanting to sell their home and buy a new one dwarf demand.

Below is an actual marketing piece from Saxon Mortgage wholesale, a Morgan Stanley mortgage chop-shop. These were loans being offered in July of 2006. As you can see here, by this time they had clearly lost all sense of responsibility in lending. Programs this out of touch with reasonable and responsible lending practices are only about  one thing — getting as many loans as they could for MBS and CDO machines.

Financial weapons such as these made to blow up unless housing appreciates at an incredible rate is the real reason for the housing and mortgage bubble.  But why did they care — after a few months the loan was securitized and sold with little recourse back to the bank. Below Morgan Stanley’s sheet is a key to what these things mean if you don’t already know.

During the years in question, 2003 – 2007, banks, Realtors, regulators and politicians branded exotic loans as mainstream. They either knew the risks and lied or they did not due proper due-diligence.  The former would compare to the cigarette companies lying about the effects of nicotine as addictive and the cigarette as cancer causing. Now they must warn people so f the consumer kills themselves its their fault. The latter compares to bio-tech companies rushing unsafe drugs through the process and hiding clinical evidence that the drug may be harmful for the ‘benefit of the greater good’.  In both reasons the manufacturer is culpable.

Consumers should not be mortgage finance or housing experts. They should be able to trust their banker or Realtor. When a bank says ‘you qualify for this loan’ it should mean something — not that at 50% debt-to-income and with every last penny of after-tax income going to debt each month your income will barely cover all of your payments.  Yes, there were greedy consumers who took advantage of the system. But in the grand scheme of things, the system failed the consumer. Hey guys — I am not a Democrat either.

I will highlight a new bank each week. -Best, Mr Mortgage

July 2006

Notes:

1. When you do loans this crazy customer service is easy — everyone loves you because you give a loan to anyone and there is no quality control making for quick and easy funding.

2. 50-year mortgages! This one speaks for itself.

3. ‘575’ refer’s to the credit score and ‘100%’ to the loan-to-value or combined loan-to-value. This is zero down/zero equity loan with 575 scores. A 575 borrower can’t even get a loan through FHA now days at many banks.

4. BK refers to bankruptcy. This is a zero down/zero equity loan to 100% with a 600 score with a BK discharged only 6 month ago.

5. BK Stmts refers to bank statements.  This means they treated bank statements the same as real proof of income such as tax returns and a pay stub. They labeled it ‘full-doc’ and could get higher prices/better ratings when sold/securitized. Bank statement lending is very risky.

6. 2nd/Vacation homes are generally treated the same as a primary residence but most 2nd homes during the bubble years were really non-owner occupied investment properties, the most risky.

8.  560 credit score is very Subprime. Allowing interest only and likely qualifying the borrower at the interest only payments vs. the full indexed payments is what is responsible for the 2/28, 3/27 reset disaster.

10.  This one is a crime. How many naive first-time buyers got their lives shattered from this one?

11. VOR refers to verification-of-rent in lieu of a property management firm or mortgage history. This just means ‘hey first-time buyer — have a friend sign this form, get it back to us and you have instant housing credit history’.  ‘Private party VOR’s’ is an endorsement to commit fraud.

12. Refers to ‘no questions asked on how you got the down payment’. This means they could have borrowed it from a bank, credit card, friend, robbed a bank etc.  Not having a seasoned down payment that belongs to the borrower makes the loan more risky.

More Mr Mortgage

63 Responses to “Morgan Stanley – It’s Big Part in the Great Housing/Mortgage Crisis”

  1. Mr M

    I still disagree with you. If you buy a stock because some Cramer says it’s a good bet but then it declines in value are you going to sue Cramer? Why not sue the brokerage? Then sue the gov’t for allowing the brokerage to be in business?
    Then sue the board of directors of the company? Then sue the city where the company is located for allowing them to do business? Then sue anyone who did business with them for perpetuating the fraud? Then sue your parent for not getting you a better education? Then sue you school for not warning to be less gullible?

    Do you see how silly your proposed argument is?!

  2. Bottomline they bought the homes because they expected them to appreciate in value. I have had realtors even today say “you can refinance” uhmmm…no you can’t!

  3. Michael Blomquist:

    Thanks for your insightful comments. May I add the most important factor in all this mess?

    Investors of securitized loans

    And they were plenty – from small towns in Norway to large pension funds in Germany and South Korea. It’s demand that drives supply. If it was not for their insatiable lust for profits to fuel the fire not much would have happened.

  4. Food and energy do not show up in the inflation figures.

    With that being said I was listening to the radio yesterday and the topic was illegal’s. They were commenting on how Mexico is afraid of all of Mexicans coming back across the border. They do not have the infrastructure to deal with the estimated 5 million who have returned. It is causing all sorts of havoc for their country. They do not have the hospitals, schools and / or jobs to absorb them all. They are in total panic!

    The radio personality was funny as she suggested that Mexico may pitch in or even pay in full to help get the damn wall built ASAP. They want to keep there own people out of their home country. Oh the Irony…

  5. I agree with 1/2 of what you are saying and the other 1/2 I do not.

    The 580 100% ltv loan has been offered by HFC since 1998. Guess what it performed. What happened was the alt a market reduced rates to much an eliminated the risk based pricing. BANKS COPIED THE PROGRAM BUT INCREASED THE LOAN AMOUNTS so they could do loans in their home state of California.

    It allowed for California dreamers to buy HOUSES NOT HOMES FOR THEIR FAMILIES BUT TO RETIRE, GET RICH QUICK AND EASY.

    Midwest, 80% of median households can afford goverment loans, max 30% in California. 11% in 2007. YOU HAVE HAD 3 PROPERTY CORRECTIONS SINCE THE LATE 80’S. the correction point was at 20%, so what do you do, pay option arm it to 11%. They it corrects back to 30%.

    California screwed us. Those not effected by the ecconomy here can not refi because the loan programs are gone. Because of you in California.
    JUST MORE SELF ASSORBED CALIFORNIA FLAKES.

    Avg home here is 130k.
    Home buyers here where buying their own homes. You all in California where trying to get rich.

    We had stable appreciation of 5 to 7% a year. YOU 20%.

    45% OF ALL NON PRIME LOANS IN THE U.S. WERE ORIGINATED IN CALIFORNIA. ALMOST HALF. Come on, look in the mirror. You were a loan officer in California. YOU DID NOT SEE IT OR DID YOU CHOOSE NOT TO??

    LOOK IN THE MIROR. BANKS, WALSTREET, AND YOU WEST COAST FLAKES RUINED IT FOR THE COUNTRY. CITIZENS OF CALIFORNIA, WALLSTREET, AND THE BANKS OWE US.
    YOU ALL ARE THE CHEATERS.

  6. Javagold, you got a 30 year fixed, right? So you are upset the market went against you and now you want to walk. I would likely do the same thing (walk) but lets cut the BS. Everyone knew there was a lot of froth in the market. You made a big bet. Had the bet worked out (levels moved in your favor) then we wouldn’t be having this conversation because you would be telling your friends and family how smart you were to buy the house 3 yrs ago and you would be more than happy to continue making your fixed monthly payments. Period.

  7. After years of research into the many factors that contributed to the current housing market conditions the root of the problem lies with the Wall Street firms and Government Agencies, who deceived homeowners and investors for profit by promoting special or creative financing. By promoting these exotic lending products to prospective homeowners, who heretofore were unable to qualify, these entities unduly stimulated real estate sales which in turn created artificially high and unsustainable home prices. FNMA and FHLMC define market value as: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affect by undue stimulus. It further states: Implicit in this definition is the consummation of a sale as of a specific date and the passing of title from seller to buyer under conditions whereby the price represents the normal consideration for the property sold unaffected by special or creative financing. Millions of homeowner and investors are not in financial difficulties, they aren’t behind on their payments, they are just “Underwater”. They can’t sell or refinance without a short sale or writing a huge check at closing for 15 years or more. There is a fix. The fix will stabilize the housing market by allowing families and investors retain their properties, with payments they can afford, knowing that 100% of their payment is going to pay down their mortgage balance. The cash saving can be used to pay off other debt, create saving and return to normal spending habits. Federal and State, government with income taxes, will profit as there will not be interest deductions. Economic stimulus without government intervention or tax payer’s dollars is the end result. Want more information? An alliance is forming. and membership is free http://www.theamericanpeoplesfix.com

  8. I am reading alot of people blaming the home buyers for overextending themselves but the fact of the matter is the following, follow me here:

    The stand in lender whose name appears on the mortgage was paid 110% immediately to a few days later for your mortgage.

    The Master Servicer bought it from the stand in lender and sold it to a Depositor for a Trust, usually a mortgage backed security. In the process making approximately 5%

    The Depositor then sold it to the Trustee for the MBS for 105-150% of the face value of the mortgage note.

    The Trustee then split the mortgage into 50-100 tranche’s and purchased insurance for the top 50 or so. This means when the home buyer did not make the monthly payment insurance or the lower tranche’s would make it for them.

    THE PAYMENT WAS STILL MADE

    Now that the insurance companies like AIG and AMBAC can no longer make the monthly payments the Trustees are unloading the MBS’s off to Treasury and the Federal Reserve.

    So everybody up the securitization chain has already been paid fort the note that was signed at closing except for the last holder, in this case the Federal Goverment.

    Now, If I am correct their is no paperwork to back up all these electronic (MERS) transfers and the last owner of the note no longer holds the actual note and never received it.

    Therefore they cannot claim any monies as they are not the holder in due course. Filing a lost note affidavit would be defeated by any first year attorney and would be looked on as as a fraud upon the courts.

    As the name implies, to re-establish a lost note the first step is to file a lost note affidavit, this means someon swearing the note was in their possession and was lost at some point in time.

    As you can see from my example the note was never in the possession of the Federal Government.

    I conclude the home owner owes NOTHING ON THE NOTE.

    The home owner was duped into a securtization transaction that needed new mortgages to fill up MBS’s that were being sold all across the world. This was an unregistered security that is void for rescission.

    I agree with Mr. Mortgage. Wall Street is clearly the blame here. They made hundreds of billions of dollars in fees and trading mortgages.

    We are told in October that the financial system is BK in America and all the profits went where?

    Bonuses, Lear Jets, Homes in the Hamptons, Bentleys, Etc Etc and the Taxpayer should pay for any new losses.

    Force the lender to prove they hold the actual mortgage on your house and I bet chances are high they say they lost it.

  9. also to add if they actually produce the note, YOU WIN.

    Their would have to be at least 3 assignments on the back of it to be legally enforceable and they are not their.

    MERS is all electronic.

    Banks now this and so this is why notes are shredded.

    Only 1% of mortgages are contested, so they get away with it and settle with anyone who fights.

  10. John Lorson:

    Happy Holidays. Good plan except for the misadvertising on the web site. I have a few questions.

    1- Since the number 1 & 2 reasons for foreclosures are unafordablity and/ or negative equity, how will your plan stop foreclosures?
    It doesn’t have to be both for homeowners to be foreclosed on or to just walk away, your website states you are the in real estate business, so you know this already.

    2- The website states principal reductions are required because of the “banks” behavoir in increasing prices. How are you obtaining principal reductions if you expect homeowners to pay the full principal balance amount, only the banks/investors interest is eliminated, that is not a principal reduction,it still leaves the homeowner in negative equity.

    3- You state that after 6.6 years of paying a mortgage payment of only principal, the homeowner can sell the house and pay off the mortgage in full, how?

    4- What is being done to acknowledge the fact that values/prices have dropped and are continuing to drop? Where are you stablizing the market as stated on your web-site?

    On your website, it shows a scenario with a current value of $175,000, in 6.6 years is the value supposed to be $260,000 the same as the original mortgage or will it be less than the current value of %175,000 ? Obviously it must remain the same at least, or the bank couldnt get paid in full.

    One last question, the payments show only principal is being paid down, interest is eliminated but there is one sentence that states interest is eliminated until the loan is paid off? Is the interest paid then?

  11. Susan Day MinSerly

    Thanks for taking your time to review the information we provided. Our example of The Fix: Purchase price $325,000, loan amount $260,000, current property value $175,000 and going down. Answer to (1) the current payment $1,558.83, the proposed Fix payment $1083.33 a monthly savings $475.50. Answer to (2) the principal balance with current loan after 5 years: $253,417.44 verses The Fix $195,000. Answer to (3) the first time an owner will be able to sell without writing a check, short sale or foreclosure for the current loan the current loan balance will be 14 years and with The Fix 6.58 years. The Fix provides accelerated principal reduction with lower payments. The bank/investor received no interest ever. (4) With lower payments and the accelerated principal reductions owners will stay in their homes and stop foreclosures. The Fix will help stabilizing the real estate market by reducing the supply of homes on the market. . The buyers must qualify with verifiable income and assets. “Verifiable Incomes” not special or creative financing will determine real estate values in the future. Prices will fall until the supply of qualified buyers meets the value of real estate. The special and creative loan products are no long available, no undue stimulus on the real estate market. Hopes this helps.

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