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View Diary: Scientists *Prove* Toxic Assets are Impossible to Regulate (268 comments)

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  •  I would like to address "where did the money go" (2+ / 0-)
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    publicv, Kristina40

    in the mortgage backed security debacle.

    The largest mass of the mortgage money went directly into the US economy and is reflected in the GDP growth in the last decade.

    New homes were built - mortgages taken and the contractors and workers were paid cash. Second mortgages were taken out on the rising value of homes and the money spent on tuition, cars, furniture, remodeling, paying off credit card debt, and whatever. Wheelers and dealers, flippers and scam artists all pocketed immense amounts of cash during the housing bubble in the form of commissions, markups and finder fees.

    The banks were only too happy to issue mortgages in exchange for cash because they took commissions up front and passed them on to the investment banks.

    The investment banks were even happier to take hundreds of thousands of these mortgages, bundle them up, and sell them on Wall St because they too also made a handsome commission on an even larger amount.

    Wall St then sold these mortgage backed securities on the world markets for cash. The money poured into the US.

    After the legitimate housing market had been satisfied, the players started selling to unqualified buyers. It didn't matter to them because they were using OPM. They got their commission check and pocketed the money. More money flowed into the US housing market. The US GDP went up.

    Then the bubble burst and the shit hit the fan. It was payback time.

    All those investors in the world markets wanted their money back. They knew they had been duped by Wall St manipulations. They knew they had been sold a bill of goods.

    The Feds only recourse was to claw back the money from the US taxpayers through deficit spending and pay the mortgage buyers back. This is why so much of the bailout money went offshore

    The only money that has gone missing from the mortgage funds are the commissions and fees pocketed during the multitudinous transactions. The total amount was so massive that even a small percent of it amounted to 100's of billions of dollars.

    In closing, I will repeat my statement:

    The largest amount of this mortgage money went to all the workers, contractors, home owners, furniture stores, appliance stores, sales agents, bank clerks, etc. etc. etc., who directly and indirectly financially benefited during the bubble.

    •  Too small and partial a picture (2+ / 0-)
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      Mz Kleen, scotths

      When you say, "After the legitimate housing market had been satisfied, the players started selling to unqualified buyers," you're deep into oversimplification in the first clause. A typical family buys the house the can afford the mortgage payment on. Before the bubble, let's say a family could afford $1,000 a month mortgage on a $200,000 house. What the bubble achieved was raising the valuation of the house to $400,000, while allowing the family to pay not $2,000 a month, in proportion to that, but perhaps "only" $1,400 a month. The family was told, "This is worth it, because see you're ending up with a $400,000 house!"

      The swindle was, it was still the same house that before the bubble - and in many cases after - had a true worth of $200,000. That extra $400 a month in mortgage payments was largely interest going directly to the bottom line of the swindlers. The home owner was paying that money for nothing of any real value.

      Yes, building supplies firms and home builders also did well, as the higher cost of homes made their businesses more profitable. They could now build the same new home they profitably built to sell for $200,000 and sell it for $400,000. But that difference, between $200,000 and $400,000, is still money that ends up owed to the banks, as most everyone who wanted to own a house was forced to spend every spare cent on their inflated mortgage to cover the inflated value of the building.

      In the end, we end up with an oversupply of houses, most of which are worth at best $200,000. In the rush to build, quality largely suffered. And we end up with millions under water in their mortgages. This is before we even get to your second clause about "unqualified buyers," which is the typical Republican move to blame it all on the poor, and which ignores that the bubble was already a major swindle - perhaps the largest in history - before it ever got to that segment.

      •  I agree it is small and incomplete... (0+ / 0-)

        It is impossible to do otherwise in a single post.

        I have a disagreement with your first point.

        If a homeowner bought a $200,000 house with a $200,000 mortgage, paying an affordable $1000 a month, he would be sitting pretty as the valuation went to $400,000.

        Unless the home was remortgaged at the new valuation and an additional $200,000 cash was obtained, his monthly payment (based on the original $200,000) would remain the same unless interest rates went up.

        All bubbles are swindles and tend to transfer wealth from the poor towards the rich.

        In the case of the housing markets, an extremely large amount of the cash received from the various financial instruments came from pension funds and foreign sources, not only from American banks. The money was received and spent within the US (for better or worse, good or bad, quality or shoddy) and went directly into the US economy.

        The people who lent the cash have been left holding the bag while people who engineered the schemes got their commissions and bonuses and are sitting pretty (unless they blew it). These people are the CEOS of the banks and the wheeler dealers on Wall St. These are the ones that rake in the money using OPM with no personal financial risk to themselves.

        My main point is that the money did not disappear. The guy who sold his $200,000 house to a sucker for $400,000 still has that cash in his pocket unless he was suckered by another swindler into buying another house. In that case, the last swindler now has the cash.

        It was was the greatest transfer of wealth in the history of mankind. Wealth has pooled with the rich while debt has pooled with the poor.

        To add insult to injury, is making a handsome profit by selling the mortgages as the housing markets rebound.

        Goldman Sachs Magic

    •  I don't think so, as the mortgages to cover (1+ / 0-)
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      Mz Kleen

      these loans collect more in interest over the life of the loan than the borrowed amount.

      Typically the amount of interest pulled in from a home mortgage can be anywhere from 2 to 5 times the price of the loan itself, depending upon interest rates, terms and conditions of the loan.

      The banks and investors theoretically stand to "make" the most money, not the homeowners.

      Remember, the homeowner actually has the real asset, the home .. the bankers have only the paper which rides upon it, and they make 2 to 5 times the amount of that loan, for simply providing up front capital.

      Try to make it real, compared to what.

      by shpilk on Sun Oct 18, 2009 at 10:01:11 AM PDT

      [ Parent ]

      •  That is normal debt financing and has been around (0+ / 0-)

        for centuries.

        What I am trying to explain is that the cash monies received from mortgages ended up in the American economy as a whole and showed up as an increase in GDP.

        The problem is that the whole thing was not based on reality - it was a bubble created by easy money and greed.

        In fact, the entire American economy has become a bubble, a bubble based on debt and money-making-money investment schemes. And this is the next one to burst...

    •  BINGO. (0+ / 0-)

      'If we lift our voice as one, there's nothing that can't be done' MJ

      by publicv on Sun Oct 18, 2009 at 02:11:10 PM PDT

      [ Parent ]

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