Cartloads Of Foreclosures Being Bundled Off

October 9th, 2007

The foreclosure storm is raging through the country doubling in ferocity.

Schiller is the Research Directory of Policy Matters Ohio. He squarely puts the blame for this situation not just on lending but on the ill health of the economy. One thing has led to another. Giant global investment firms purchased cartloads of mortgage loans with floating interest rates but it is not illegal.

Metzger of First Federal Bank explained that Federal loans however are not packaged and sold to investors. The bank’s mortgages are sold to the Federal National Mortgage Association and also to the Federal Home Loan Mortgage Corporation. In short these are referred to as Fanny Mae and Freddie Mac. This system is an alternative method to banks giving out loans from deposits. Nearly 80% of borrowers in the country have had their loans sold to the secondary market – that is to Fanny Mae and Freddy Mac. The latter are government-sponsored bodies. It is they who are lending the money via the banks and offering fixed interest rate for periods ranging from 15 to 30 years. The service of the loans remain local but the mortgages itself are sold off one by one – and not in bundles – to Fanny and Freddy.

The fixed rate mortgage is not causing the turmoil. It is the ARM or floating rate that is making it tough for borrowers because after a year or two the rates abruptly more than double. The outside firms are not familiar with the colour of the local economy. So they get enmeshed in a mess.

But Schiller does not buy this argument about ignorance. There are rogue mortgage brokers and non-bank mortgage lenders who somehow push through a deal for the sake of commissions and fees without bothering about the borrower’s capability to repay the loan in future.

Andrew Kiess exposes facts about large brokerage houses making tidy sums by buying mortgages. At each step there is something for the pocket. Take a carload of loans and sell it to the investor. You get paid. The investor now takes it to the securities market and takes a cut for doing so. Other beneficiaries are the servicing agents who are under contract to collect the monthly dues. The investor does not foreclose but the servicing company who is unable to collect dues. Current law protects the lender and lender alone.