Due to my recent head explosions I had been unable to keep current with my posts. This happened the instant that I heard that the governement (that is, we the people) bought out Fannie Mae and Freddie Mac. After I pieced my head back together and cleaned the walls I hear that we also bought AIG. That was when this photo was taken. I have now fully recovered, but the walls are a lost cause. I'm going to Home Depot for some red paint.
I honestly had no idea what the hell Fannie and Freddie did until after I bought them. After a week of research I guess I know what they do, but I sure as hell don't understand it. I'm not going to take up all my blog space with details. They take the value of existing mortgages as collateral for new loans. Let that soak for a moment. They use other people's existing loans as collateral for new loans.
Let me use a smaller scale example to show how absolutely crazy this is. Let's say that I want to get a loan to buy a house that costs $100,000. I walk into the bank to talk to a loan officer. I have no down payment, no credit history, no assets, and no cosigner. However, there are five people that live on my street who have $100,000 mortgages for their houses in different banks in town. Each of those other people have paid in $20,000. To secure my loan, I tell the loan officer to "purchase" those other five loans from the other banks. So, my bank pays the other banks a total of $500,000 plus a little interest to purchase the other loans. Those other five people still pay their own banks and have no idea this happened.
Since each loan has $20,000 in equity, my bank now has a total of $100,000 in equity, which they give to me to purchase my house. So now my bank has $500,000 in liability and zero assets. The other five banks still count each original loan's $20,000 as their equity. My bank now relies on the other five borrowers and me to make our montly payments to bring in assets. If just one of us forcloses, the bank resells the house. With the housing market no longer overvalued, it can only sell the house for $85,000. That means the bank just lost $15,000. If my bank hadn't given me my loan, the bank would have actually profited $5,000 since the original loan had $20,000 paid into it.
That sounds like a pretty bad situation doesn't it? But wait, it gets worse. Much, much worse. Let's throw in some varibles. Let's say the guy that forclosed actually had taken out a second mortgage to pay his credit card bills, buy a boat, or just spent it on hookers and booze. So the original note of $100,000 became $140,000. Now the bank lost $55,000.
But it couldn't get any worse than that, right? Well, Congressional Democrats (including the entire Presidential ticket) want that person who foreclosed to keep his house. That means the bank can't resell the house. That means a total loss of $120,000 on a house that was originally only valued at $100,000. And the bank has zero assets and still has another $400,000 (or more) in liability. Hooray, Democrats.
Now, to understand why Frannie and Freddie were "too big to fail," just change the $500,000 total liability in the above example with $6,000,000,000,000. We must also understand that when Frannie and Freddie "purchase" these loans, they never leave the books at the banks from which they buy them. The actual consumer never knows that their equity was used to secure loans for other people. So, when you take out a second mortgage, you're actually taking out a third mortgage. In the above example, the bank that originated the loan currently has the right to collect the $20,000 of equity from my bank in the case of a forclosure. If Frannie and Freddie closed shop, it would mean that half of the home equity in America (that's $6,000,000,000,000) would just disappear out of banks all over America.
So, you and I have oficially purchased these two brilliant companies. But what you didn't know is that they had already taken every ounce of equity you thought you had in your home. They took it to loan it to other people. And the insanity of it all is that even with government control, they show no signs of stopping this practice. This system was originally designed to help poor people secure loans to buy modest homes. Today, it is being used to secure loans to buy wealthy people (including many politicians) multi-million dollar mansions that they could even pay for in cash.
Now this system is not limited to just Fannie and Freddie, they compose only half of the secondary mortgage market. That means there is another $6,000,000,000,000 out there in secondary mortgage companies with palms outstretched. So those talking heads that say this buyout will cost taxpayers over $1,000,000,000,000, get ready to purchase the other half soon.
Now, I've always said that I don't deal with solutions, but I have a little more to say. These companies may be too big to fail, but this system is far too insane to continue. We may not be able to close them down, but for the love of all that is good and pure, heed the words of Lemonhead from The Shield. "Why can't we just do what we're supposed to do and stop?"
20 September 2008
Have You Ever Seen Scanners?
Due to my recent head explosions I had been unable to keep current with my posts. This happened the instant that I heard that the governement (that is, we the people) bought out Fannie Mae and Freddie Mac. After I pieced my head back together and cleaned the walls I hear that we also bought AIG. That was when this photo was taken. I have now fully recovered, but the walls are a lost cause. I'm going to Home Depot for some red paint.
I honestly had no idea what the hell Fannie and Freddie did until after I bought them. After a week of research I guess I know what they do, but I sure as hell don't understand it. I'm not going to take up all my blog space with details. They take the value of existing mortgages as collateral for new loans. Let that soak for a moment. They use other people's existing loans as collateral for new loans.
Let me use a smaller scale example to show how absolutely crazy this is. Let's say that I want to get a loan to buy a house that costs $100,000. I walk into the bank to talk to a loan officer. I have no down payment, no credit history, no assets, and no cosigner. However, there are five people that live on my street who have $100,000 mortgages for their houses in different banks in town. Each of those other people have paid in $20,000. To secure my loan, I tell the loan officer to "purchase" those other five loans from the other banks. So, my bank pays the other banks a total of $500,000 plus a little interest to purchase the other loans. Those other five people still pay their own banks and have no idea this happened.
Since each loan has $20,000 in equity, my bank now has a total of $100,000 in equity, which they give to me to purchase my house. So now my bank has $500,000 in liability and zero assets. The other five banks still count each original loan's $20,000 as their equity. My bank now relies on the other five borrowers and me to make our montly payments to bring in assets. If just one of us forcloses, the bank resells the house. With the housing market no longer overvalued, it can only sell the house for $85,000. That means the bank just lost $15,000. If my bank hadn't given me my loan, the bank would have actually profited $5,000 since the original loan had $20,000 paid into it.
That sounds like a pretty bad situation doesn't it? But wait, it gets worse. Much, much worse. Let's throw in some varibles. Let's say the guy that forclosed actually had taken out a second mortgage to pay his credit card bills, buy a boat, or just spent it on hookers and booze. So the original note of $100,000 became $140,000. Now the bank lost $55,000.
But it couldn't get any worse than that, right? Well, Congressional Democrats (including the entire Presidential ticket) want that person who foreclosed to keep his house. That means the bank can't resell the house. That means a total loss of $120,000 on a house that was originally only valued at $100,000. And the bank has zero assets and still has another $400,000 (or more) in liability. Hooray, Democrats.
Now, to understand why Frannie and Freddie were "too big to fail," just change the $500,000 total liability in the above example with $6,000,000,000,000. We must also understand that when Frannie and Freddie "purchase" these loans, they never leave the books at the banks from which they buy them. The actual consumer never knows that their equity was used to secure loans for other people. So, when you take out a second mortgage, you're actually taking out a third mortgage. In the above example, the bank that originated the loan currently has the right to collect the $20,000 of equity from my bank in the case of a forclosure. If Frannie and Freddie closed shop, it would mean that half of the home equity in America (that's $6,000,000,000,000) would just disappear out of banks all over America.
So, you and I have oficially purchased these two brilliant companies. But what you didn't know is that they had already taken every ounce of equity you thought you had in your home. They took it to loan it to other people. And the insanity of it all is that even with government control, they show no signs of stopping this practice. This system was originally designed to help poor people secure loans to buy modest homes. Today, it is being used to secure loans to buy wealthy people (including many politicians) multi-million dollar mansions that they could even pay for in cash.
Now this system is not limited to just Fannie and Freddie, they compose only half of the secondary mortgage market. That means there is another $6,000,000,000,000 out there in secondary mortgage companies with palms outstretched. So those talking heads that say this buyout will cost taxpayers over $1,000,000,000,000, get ready to purchase the other half soon.
Now, I've always said that I don't deal with solutions, but I have a little more to say. These companies may be too big to fail, but this system is far too insane to continue. We may not be able to close them down, but for the love of all that is good and pure, heed the words of Lemonhead from The Shield. "Why can't we just do what we're supposed to do and stop?"
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