Beware of the new lending bubble

What is clear to me is that nothing has changed except the government complicity in predatory lending practices is increasing despite the passage of Dodd Frank. A fact that keeps getting buried here is that Federal Law (Truth in Lending Act) puts the burden of determining affordability of an alleged loan product on the lender, not the borrower. That is the whole point of the Act — to avoid mistakes that borrowers might make with sales pitches that will result in financial ruin for borrowers and extreme wealth for underwriters on Wall Street.

When you see “CashCall” offering loans to people who have a FICO score of 585, we all should ask “how can they make money on alleged loans that are going to fail.” Legally the question becomes one that scares the hell out of the banks: having given a loan to someone who needed their help in making the down payment and who have a bad credit history, is the defense to the foreclosure action properly stated if “assumption of risk” or some other related defense is asserted?

The additional question is who is putting up the money for national advertisements on TV, radio and written media to get as many people as possible to take a loan they cannot pay. This is especially true when an alleged adjustable rate mortgage is involved with negative amortization and a teaser payment.

If the burden of affordability is on the lender and not the borrower and the loan resets to a payment higher than the entire household income the outcome is guaranteed to produce a “loss” that will be covered by multiple levels of derivative and hedge products that will turn the loss into a windfall for the intermediaries.

The effect of the foreclosure is that it rubber stamps plainly illegal behavior. The good faith estimate is completely  fictitious. The term of the loan is not 30 years; it is 3 years or whenever the loan resets. That means whatever fees are amortized over the life of the loan should be amortized over 3 years, not 30. So the cost of credit is falsely stated.

And of course the primary directive of TILA that the lender be disclosed is being completely overlooked. CashCall is not lending the money in the sense that they have no risk of loss. The value of the loan to CashCall must be in the fees it receives for acting as a sham conduit.

I also doubt if the promissory notes executed by borrowers in such a situation are negotiable instruments, especially when you consider the possibility of TILA rescission, which is a condition not stated on the face of the note.Shows how securitization worked. Partially correct. BEST IN CLASS

I give the following video a 90%+ rating. It doesn’t cover the sham conduit originator but otherwise it appears totally correct.

Shows how securitization worked. Partially correct. BEST IN CLASS

Check this out:

No Savings? No Problem. These Companies Are Helping Home Buyers With Down Payments
The Wall Street Journal

Lenders are coming up with novel ways for buyers to cobble together down payments. Read the full story

7 Responses

  1. Oh, yeah. That pesky right of rescission. It may well by its lonesome preclude these notes from being negotiable (which I don’t think they are, anyway.) I don’t think the SEC allows notes endorsed in blank to be traded, either. Can’t prove it. Maybe someone else will make it his or her mission. ( I didn’t pull it out of the air; I read it somewhere and then lost it and I needed more clues to try to run it down).

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  2. annual p”That is the whole point of the Act — to avoid mistakes that borrowers might make with sales pitches that will result in financial ruin for borrowers and extreme wealth for underwriters on Wall Street.”

    The ‘point’ of the Truth in Lending Act was to try to get lenders to self-govern when making loans and to stop unfair competition gained by false and misleading advertizing. For the moment at least, take my word for it that the larger the difference between the interest rate and the a.p.r., the higher the true cost of the loan. If Apple Mortgage advertizes a rate of 4% and Orange Mortgage advertizes a rate of 5%, where you gonna go? The a.p.r. discloses the real cost of a loan. One loan may be 4% interest rate, but the a.p.r. is , say , 6.227. The 5% loan may have an a.p.r. of 5.71, making it the better loan. But without true disclosure of the a.p.r., you wouldn’t necessarily know that. The act should have meant, if it didn’t, that no agency would have to police every stinking loan made for compliance with disclosures, like the ercentage rate. Biff and the homeowner can rescind.. Rescission is obviously a big deal, was by design, and that drastic remedy was meant to compel compliance with the Act, that is, comply by making honest disclosures as to the a.p.r., amt financed, and so on on the truth in lending Regulation Z form. It’s also illegal to advertize a home loan interest rate without its corresponding a.p.r. and has been since the act was passed.It’s been 10 years since I looked at rescission cases. I have a boatload of cases which I’ve finally found but haven’t re-read (they’re older cases). I can put them somewhere if anyone’s interested.

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  3. “That is the whole point of the Act — to avoid mistakes that borrowers might make with sales pitches that will result in financial ruin for borrowers and extreme wealth for underwriters on Wall Street.”

    The ‘point’ of the Truth in Lending Act was to try to get lenders to self-govern when making loans and to stop unfair competition gained by false and misleading advertizing. For the moment at least, take my word for it that the larger the difference between the interest rate and the a.p.r., the higher the true cost of the loan. If Apple Mortgage advertizes a rate of 4% and Orange Mortgage advertizes a rate of 5%, where you gonna go? The a.p.r. discloses the real cost of a loan. One loan may be 4% interest rate, but the a.p.r. is , say , 6.227. The 5% loan may have an a.p.r. of 5.71, making it the better loan. But without true disclosure of the a.p.r., you wouldn’t necessarily know that. The act should have meant, if it didn’t, that no agency would have to police every stinking loan made for compliance with disclosures, like the annual percentage rate. Biff and the homeowner can rescind.. Rescission is obviously a big deal, was by design, and that drastic remedy was meant to compel compliance with the Act, that is, comply by making honest disclosures as to the a.p.r., amt financed, and so on on the truth in lending Regulation Z form. It’s also illegal to advertize a home loan interest rate without its corresponding a.p.r. and has been since the act was passed.It’s been 10 years since I looked at rescission cases. I have a boatload of cases which I’ve finally found but haven’t re-read (they’re older cases). I can put them somewhere if anyone’s interested. As to home loans people don’t really qualify for, it’s always been the lenders mandate as a matter of law not to make those loans to them. But they and the slime-dogs they hire don’t give a you know.

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  4. anon – No party can fix the problems that have accrued over decades. All they can do is continue to try conceal from the American public.

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  5. The massive foreclosures caused by Republicans by not renewing HAMP is to have cheap houses for sale in the market. They are now bought, sold and resold. There is a good possibility that these people may not be able to hold job too long as we may be at the trailing edge of old glory of Obama economy. The end result may be another foreclosure mess.

    Some may say that there are a lot of fake job postings everywhere. November is coming and vote with commonsense.

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  6. This video leaves out a lot. 1) Who is the Lender? TILA says there must be a lender. Federal reserve says investors are not the lenders. All those investors are not lenders to borrowers. They do not directly lend. Investors are simply beneficiaries of pass through cash flows and should have nothing to do with the borrower. Cash flows is the business of the banks and investors. Neither is the mortgage broker the lender So who is the Lender? There never was one. 2) Once a loan is reported in default it removed from cash pass through via the swaps. Who is that creditor ? Borrowers have a right to know. 3) Where did these loans come from ? Most were refinances – not new purchases as the video suggests. 4) Who were top tranche investors in these so called trusts? We know who. 5). Not all people defaulted or foreclosed The percentage is way higher for those who did not default. Why are these people still lumped into the distress debt path ? The problem is the loans were never valid to begin with. But many debt buyers are still surviving on the Scheme’s fraud

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