"The Banks Were Forced......" To Churn-and-Burn?

Frankly, I thought I was a cynic.

As it turns out, I'm not even close.

Most of the "exotic" loans being made during the housing boom were never intended to, on balance, be "paid as agreed" leading to a clean "fee simple" title on the property. An "Option ARM" or "Subprime" loan that qualified the buyer at the teaser rate (or anything similar), where the forward view three or five years later would result in a payment of two or three times the original amount implied a per-year compound annualized growth in income of 15-20% for the buyer. This was not disclosed, of course, yet it is what was being "discounted" in those notes, and without that capacity these notes were entirely reliant on "return business" to avoid default.

Got that? What Ticker's saying is that the low-ball rate deals were set up with the knowledge that most of the borrowers could not possibly pay the note in the typical 30-year term.

AND that the low-ballers deliberately built a trap, forcing the borrower to return and refi.

That "return business" turned the contemplated transaction into nothing more than a churning operation. Indeed, many borrowers were even given some variant on the theme: "come back before the reset and simply refinance!" The problem here is not simply that this cycle depends on ever-ascending asset prices - it is that this is not a mortgage in the legal sense at all, but rather is a sophisticated capital market bet that happens to involve most people's largest asset - their house

You doubt that? Then look at the ROI/profitability here.

Let's posit a $200,000 mortgage. If I make one 30 year mortgage and you pay it off over 30 years, I make one set of fees. Application, processing and similar fees might total $2,000 - $3,000 for the bank, with another $1,000 paid in title insurance and of course the other fees that are larded into the pie (e.g. doc stamps for the county, etc.)

The point here is that the bank makes perhaps as much as 2% of the gross face amount of the loan right here and now on the mortgage.

Let's assume that the bank borrows money at 5% and lends it at 7%. They thus have a NIM, or "net interest margin", of 2% on the transaction. "Turned" via fractional reserves they might be able to crank out a 20-25% gross pretax operating margin on lending operations. Not a bad profit margin for what is essentially a utility function.

Now let's presume that the bank is able to somehow force you to come back into their office every couple of years and refinance that mortgage. Suddenly they can take what is a 2% NIM and add on another 1% (annually, since it's every two years) in fees and costs. Oh, now we're getting somewhere, right? That's an instantaneous 50% improvement in their gross money, and cranks up that 20% pretax margin to 30%!

Oh, yah. It was all the fault of CRA/Clinton/Congressional Lefties.

There's no question that the Congressional Lefties were complicit--in fact, since most of them were bought-and-paid-for by the banking interests, they forced the GSE's to get into the game, buying the mortgages to hold, thus ensuring more "churn-and-burn" profits for the banks.

But swallowing the Yappers' Mantra that 'the poor, poor, bankers were dragged, kicking and screaming, into these loans' is simply naive, stupid, or willfully obtuse.