Smart Borrower Blog

And The Winner Is…

Dec 21st, 2007 @ 3:32 PM by Alden Smith

We have had the sub prime mess shoved down our throats for so long that it seemed a real relief to hear President Bush attempting to make a stand to help homeowners who were victims of the sub primes debacle.  I have written on this a lot this year, and have been very interested in what transpired.  Yet, the deeper I dig into this affair, the more I see that does not sit well.

Who Benefits From Bush’s Plan?

We would like to think that the homeowners facing foreclosure would be benefiting from the newest proposal.  Reality shows that very few people will get any relief.  Surely some good has to come of this.  And it does – for the Wall Street banks.

A Look At Some Figures

The current situation is based on figures, and figures don’t lie.  As far back as 2000, we were seeing the sub prime situation unfold.  In that year, loans amounted to $136bn.  In 2006, it had risen to $635bn.  And in 2006, 25% of all mortgages were sub prime loans.  Half of these loans were “no document” loans.  Here’s what smells. A recent Wall Street Journal shows that 55% of all sub prime loans in 2005, the peak year of the sub prime boom, went to borrowers who met the qualifications for lower-interest conventional mortgages. The proportion rose even higher by the end of 2006, to 61%.

Was Anyone Aware?

The answer is a hearty yes!  Wall Street bankers knew all along that this was happening. Facts show that the entire scheme was engineered by these bankers.  Knowing that people qualified for a conventional loan, many banks and their affiliates talked unsuspecting people into the better looking sub prime loans.  Their paychecks depended on it.  Commissions on a conventional loan were 1.48% of the loan amount.  For the sub prime? 1.88%.  Do the numbers.

So Who Benefits?

The Wall Street banks will benefit from the new proposal.  The new rules would prohibit so-called “no document” mortgages.  And the new rules also would assign no liability to Wall Street firms for effectively underwriting predatory sub prime loans. Borrowers would be allowed to seek compensation if the new rules are broken, but only in a limited amount.

The New Cure

It is good to see some action taken by the Fed to stop predatory lending practices.  But it is rather like locking the barn door after the horse has been stolen.  Because of the crash of the sub prime market, lenders are not doing this any more, anyway.  And the winner is…

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