The State of Our Union

We are in a Depression. Although this can be argued through evasive rhetoric, it is the truth. These are very interesting times, and, despite what most “experts” say, this is only the beginning. That said, I am not going to discuss these topics, but, rather, break down the reason for these catastrophic events that are occurring. The answer is simple: mortgages.

The majority of Americans have no idea how the mortgage industry works. In 2006, a close friend worked for a small mortgage company on the east coast. The business practices he witnessed were shocking and appalling. Documents were forged. People were lied to. Banks provided ways for people to obtain a mortgage, even though the banks knew the borrower could not afford them. The bank representatives had and still have no loyalty to their abstract employers. And who suffers? The American people.

My friend explained that when he started working as a consultant, his company was signed on with 140 banks. Within the first month, they had lost over half of them to bankruptcy. Here is an example of a typical mortgage deal with a sub-prime borrower. Say their credit score is a 530, which is very low. The borrower would not qualify for 100% financing. So what do the bank representatives suggest? First, have them sign on to a friend, family member, or even the broker’s credit card. This gives them more trade lines and boosts their credit. Next, the banks reps would suggest to give the borrower, say, $25,000 through a private loan with the broker. This gives the bank, not the reps mind you, the illusion that the borrower has capitol. Many times, after the loan is cleared, that money is given back to the broker immediately. Crazy? Just wait, it gets worse.

Because of these shady dealings, brokers would have anywhere from 3-12 disclosures for the borrower to sign. Basically, these stated the all the information was true and the broker would not be held responsible for any of the ramifications if the borrower could not make his or her payments. With these signed and the money lent through the personal loan, it would be enough for a sub-prime lender to close the deal on the mortgage. The deal is closed. The broker and bank rep makes thousands of dollars. The broker is seen as a hero for making the impossible happen, and everyone is happy. Everyone wins.

The majority of the time, however, it not possible for the borrower to make the payments. Houses are foreclosed and the banks lose hundreds of thousands of dollars. The borrower is bankrupt and the banks eventually close. With no home and no money to spend the state of our union is created. Then the broker becomes the villain and is no longer the hero; But as Ivan Klima explains in his essay “The Heroes of our Time”, “These are the heroes of our age and, and every age has the heroes it deserves.”