Sunday, October 4, 2009

It's a long fall.

Let's see how many people jumped into the mortgage debacle volcano starting from the top down. Freddie Mac and Fannie Mae were not rim dwellers in this story. Some will be surprised at the diversity of threads that make up the fabric of the participants.

This is a tale of international proportions. It starts with the IMF, or International Monetary Fund. This includes all the savings in the world. That means everything from your savings account to the Federal Reserve System.

Up to the new millennium, those savings, or the global pool, came to $35 trillion or so. Of course, all the participants think the more money in the savings account, the better.

By 2007, the global pool had grown to $70 trillion. That means it took all of recorded history to establish $35 trillion in savings and it doubled in about seven years.

How did that happen? In the infancy of the new millennium, Alan Greenspan set Federal Reserve funds really low.

The world-class money managers started to look around for better ways to make their savings grow.

The big securities firms, like Morgan Stanley, Lehman Brothers Holdings Inc., American International Group Inc. (AIG) and others, made note of this. Their most powerful executives spent hours wringing their hands to figure a way to latch onto these savings.

The giant investors liked residential mortgages. They were quite secure and fairly low risk. Like Oliver Twist, they could only say, "More, please?"

The securities brokers couldn't sell more until they got more. By now, most borrowers with good credit, sufficient, verifiable income, down payment, closings costs and reserves already had a mortgage. The securities geniuses concluded they needed new blood.

Some of them established private mortgage banks. These are companies like Fremont General Corp., BankUnited, Colonial BancGroup Inc., Senderra Funding LLC, Taylor Bean & Whitaker Mortgage Corp., Impac Lending Group and more.

The securities firms went ever farther out on the limb, agreeing to buy no income verification loans, option adjustable rate mortgage's with mortgage payments that would double or triple once the rate reset, and loans to people with bad credit, unstable employment and no reserves for emergencies.

The mortgage bankers were able to get warehouse lines that allowed them to fund the loans. The securities firms agreed to buy the loans, thus refreshing the available warehouse lines.

I have in my files companies that offered 100 percent financing for borrowers with a 620 credit score and no requirement to verify income.

None of the cornerstone lenders such as Wells Fargo and JPMorgan Chase & Co. ever encouraged me to lie. However, I can't say how many account executives with other companies said, "It's a stated income loan and you can state anything because it won't be verified." Not even if I had to look up to see sod would I do that.

The borrowers were tenacious. Being turned down once or twice by legitimate lenders, they turned to these "subprime" lenders.

How many borrowers have we heard from who earn $40,000 to $50,000 per year and are astonished to learn their loan application shows $10,000 per month income? Still, they didn't notice this when they signed the loan application? They didn't notice it when they signed the application again on closing day?

But where's the money?

A man from California stopped in our office one day this year. Until its recent collapse, he had run one of the mortgage banks as the front man for a securities firm.

He told stories of $80,000 per month wages, box seats at sports events and personal residences worth millions.

He offered to go to work for $30,000 per year and a place to live.

The question is, what happened to all his money?

How about the couple here in Key West who bought a home in March 2006 for $567,600 with 100 percent financing (financed by a mortgage bank)? In February 2007, they took out a new loan for $648,000 funded by a mortgage bank.

Now they risk losing their home. Where's the $81,000 they received from the new loan?

By the way, what appraiser concluded the property increased nearly 15 percent in value in that 12-month period?

What about another couple who bought their home for $451,000 in 2004 with 100 percent financing from a mortgage bank? They refinanced in 2005, taking out an additional $74,800 cash. They took yet another $77,600 cash out by refinancing (with a mortgage bank) another time in 2006.

By the time the short sale on this property closed last year, the owners owed $602,800 and their mortgage company approved a sale price of $350,000.

What did the sellers do with the $152,400 cash they received from the refinances?

Remember, too, that one element of a short sale is that the borrower stops making payments. In my examples, that results in an additional $3,500 to $4,500 windfall for the owners.

I wish somebody would pay me $100 for each case like this I could find. I'll bet there are hundreds of them in Monroe County alone.

What do you think?

Regina E. Corcoran, SRA, is a Florida real estate broker, state-certified residential appraiser and residential contractor. She is president of AmeriRealty Corp. and vice president of AmeriMortgage Corp. She can be reached at ReginaECorcoran@cs.com. Corcoran writes her column exclusively for The Citizen. It appears every other Sunday.