Housing's Ill-gotten Gains
“When in doubt tell the truth”- Mark Twain
Honesty is the best policy. Twain knew this well. But unfortunately in the housing market the truth is often the first casualty of the bidding war.
Nowhere is this more apparent than in the mortgage industry where the lack of truth has helped create a slippery slope of foreclosures and illusory housing prices.
This is the seamy underbelly of the housing boom. A land of winks and nods.
In it, borrowers lie, fib and fudge their way to ill-gotten gains. And all along the road, willing loan officers coach them and look the other way.
Sure it's wrong. But if this how deals get done, then what's the problem?
Welcome to the new mortgage paradigm.
Its mantra is simple- whatever it takes.
But the truth is that its fraud -plain and simple- and in the end, it costs us all.
In fact, the FBI estimates that mortgage fraud losses topped $1 billion in 2005 alone compared with losses of $429 million the prior year.
Unfortunately it's a growing problem and one that has become a nationwide epidemic.
Where Will America Go When The Sheiks Run DryMiddle East oil fields are parched. Even the Giants such as Ghawar, Burgan and Safaniya-Khafji are requiring POST PEAK PRODUCTION METHODS to squeeze out every last drop.
And as the situation worsens, America is turning to some unexpected allies - safe from any terrorist threat or Oil Cartel. A few lucky investors who saw it coming a year ago are already sitting on more than 136%. But that's just a drop in the bucket when you see where it's headed.
Leading this problem has been the increasing pervasiveness of "stated income loans".
Otherwise known as "liar's loans" these mortgages have become the tool of choice for borrowers and loan officers alike. Without them many a deal never would have made it to settlement.
And for good reason.
A "stated income loan" after all is a loan where the income that is put on the application is never verified by the bank.
In essence, the bank simply takes the borrowers word for it!
And because a loan approval is largely dependent on a borrower's gross monthly income, loan officers often coach borrowers on the amount that needs to written into the blank to qualify for the loan amount.
Borrowers wink, loan officers nod and the fraud is complete.
The result is a borrower with a loan amount that they couldn't otherwise afford.
Unfortunately many of these "lucky" borrowers end up in foreclosure.
But regardless of this fact, stated loans have gained increasing popularity.
Designed originally for commission based professionals and the self-employed borrowers that typically had a hard time documenting their income, the stated loan has gone mainstream.
In fact, industry figures estimate that an amazing 37% of all loans done in the United States since 2002 have been done without income verification. In a bubble inflated area such as California and Florida, the figure is even higher. For these areas the number is as high as 50%.
Needless to say, a large majority of these loans are built upon a house cards.
A recent sample of 100 stated income loans revealed that in 60 % of those loans borrowers exaggerated their income by more than 50% to qualify!
Tracey Rodgers of Cleveland was one such borrower. Her loan application "stated" her salary at a robust $62,000 a year. Not bad for a supervisor at a produce company.
That amount qualified her for a $360,000 in loans. But only if it was the truth.
In reality she earned about $30,000... or less than half of what she stated.
On top of it all she also "stated" that she had $56,000 in a bank account with National City Bank. It was only later that it was discovered she not only didn't have that amount but that she never even had an account with the bank.
Not surprisingly it ended badly and the property is in foreclosure.
But given the "real" figures it was a forgone conclusion.
At a real salary of $30,000 /year Ms. Rodgers monthly income was only $2500 per month.
However the principal and interest on her loan was $2158.00 a month alone!
Of course it wasn't long before the loan went into default.
But Ms. Rodgers was hardly alone. The truth is that there are hundreds of thousands of borrowers just like her all across the nation and the statistics prove it.
Loan defaults are on the rise all across the country and foreclosures have begun to spike as a result. In California alone there has been a stunning 104% increase in foreclosures.
But with all of the fraud and foreclosures you would think that the banks would eliminate these loans. The truth, however, is otherwise. Amazingly they still encourage them.
And the reason is simple- the loans are profitable. And banks like profits.
The truth is that banks allow these risky loans to gone in such high volumes because days after the loans are funded they get pooled together with millions of dollars of other loans. These pools are then sold to financial institutions, pension companies, life insurance companies, foreign governments, and the US Federal government.
It's what is called the secondary market and it's an easy and profitable sale.
In fact, between 40-50% of all loans are owned by the Federal Government.
Once these loans get sold off as mortgage backed securities the banks simply go back out and sell some more. And because the lender takes very little risk the practice not only continues but is encouraged.
But while this little arrangement is highly profitable for the bank and the loan officer that originates them it comes at a price.
The truth is that stated loans hurt everyone, not just the suckers that buy them on the secondary market.
They do so because they are built upon one falsehood after another. And it is these falsehoods have helped drive up the price of housing all across the nation.
Think about it. A loan is about one thing-purchasing power.
Stated loans simply skew that power in the favor of the seller.
Without the availability of these types of loans borrowers wouldn't have been able to lie their way to higher prices.
You see it wasn't just the low rates that caused the bubble but the existence of stated loans that helped push housing prices higher and higher.
And like the loans themselves the value of the homes they bought is but an illusion.
Ms Rodgers is not alone.
She is the tip of the iceberg.
But the banks don't care.
All they care about is profits. If some consumers are hurt in the process so be it.
It's a brave new world. And it has only one rule...whatever it takes.
But it's a world built upon lies.
Unfortunately it cannot hold.
Copper to Collapse?
The headline has the effect of a sewing needle in a Macy’s parade balloon:
CHINA’S COPPER IMPORTS DOWN 24%
To the untrained eye, this could be seen as a commodity disaster. And if you didn’t know better, you could be selling your copper stocks in a red-hot, rising market.
But the headline isn’t the whole story for savvy traders who follow international markets like a hawk.
Here’s the real deal…
China’s burgeoning construction and property economy currently consumes a full 20% of the world’s copper. And this penny material brings in a lot more than chump change on the world market.
As China’s growth continues, it has to recalibrate the Shanghai futures price to the London Metal Exchange, copper’s biggest worldwide mercantile.
So China’s government initiated a sell-off of domestic reserves this year, to bring supplies and prices down to balance with worldwide numbers.
So does China’s drop in copper imports mean the Waking Dragon is done ravaging the world’s construction commodities?
As the local selling program draws to a close, imports will become attractive again, and we will see another bull run on copper driven not only by China’s hunger but also supply volatility in Chile, Zambia, and elsewhere.
Rest assured that I will be keeping my eye on every development in the commodities world as emerging markets set the pace as the Hungry Hungry Hippos of the 21st century.
Click here to subscribe to my FREE Orbus Intel e-letter and get the first crack at the companies who are about to make a mine’s worth off this renewed metal mania.