Imagine a loan of $100,000 based upon (1) a borrower’s true income / ability to repay and (2) the true value of the real estate collateral. Now imagine a loan of $100,000 based upon (1) fictional income figures and (2) fictional valuation of real estate collateral. Which type of loan do you think predominated in the United States for the last five to ten years?
Now imagine these “liar loans” were bundled into securities with a few good loans thrown on top to make them smell nice. A little like giving someone a stack of bills with $100 bills at the top and monopoly money underneath. Then imagine those bundled securities are sold to various pension funds and foreign investors. Sound familiar?
Add in the fact that you are now the treasury secretary of the United States, formerly with Goldman Sachs, one of the major players in this bundled securitization scheme and you are facing record foreclosures and home price devaluation. What do you do?
Do you worry that those pension funds or foreign investors might sue your banking buddies for selling them a bill of goods? You bet you do. So how to fix the problem?
The answer: freeze mortgage interest rates for five years in a massive national refinancing scheme.
It’s a brilliant plan. You appear to be the benevolent bureaucrat, concerned for the “working man” who is going to “lose their home.” You even get to claim that you are doing a service to all those investors in mortgage-backed securities because, after all, they are better off taking a little less interest than dealing with the expense of foreclosure, right?
But not so fast. Did you catch the flim-flam? Did you spot it?
You see, in five years, those same people will own real estate that, let’s face it, is going to be worth the same or, most likely, less money at that time than it is today. And please spare me the National Association of Realtor’s rosy projections on home valuations. Those cheerleading saps have never been right about predicting home values and live in a perpetual state of euphoric denial. Moreover, even if unemployment stays as low as it is and wage growth continues in a Goldilocks economy, once the rates unfreeze, those people will be facing the very same issues. And what if we get that recession that everyone’s talking about?
Do you see it now? Well here it is: after the five year rate freeze, those bankers who sold the fraudulent junk debt will have a great defense to any claim that the junk was fraud. Namely, they’ll be past most statutes of limitation and be able to turn back to the suckers – I mean investors – who bought those securities and say the investors “knew all along,” and certainly knew as of the rate freeze, about the true income and valuation status underlying the various mortgages in the packaged securities.
Such as plan is equally ingenious and corrupt, but don’t be fooled by the flim-flam man. Although this plan is going to save Wall Street, get ready for one hell of a ride on Main Street, because it is you, me and our children that are ultimately going to pay the heavy, heavy price in the years to come.