How Things Works
1. Briefly, how it works is this, the Lender would secure a large loan from a large bank, convert that loan into 20 and 30 year mortgages, then sell the promise to pay to an investor.
2. Usually a Real Estate Agent would contract with a seller to find a buyer, and then bring both seller and buyer to a lender who would secure the title from the seller using the funds borrowed for that purpose then trade the title to the buyer in exchange for a promise to pay (Promissory Note, or simply The Note) a certain amount over a stipulated term. The lender, however, has created a 20 or 30 year mortgage with money the lender must repay within 6 months, therefore, as soon as the closing is consummated, the Promissory Note is pooled together with others and sold to an investor.
3. Using a sample case as an example, a $139,200.00 Note at 7.8980% interest over 30 years will produce $352,108.80. The lender can then offer up the security at say 50% of the future value to the investor. The investor will, over the life of the Note, less approximate servicing fees, realize a profit of $180,466.72. The lender can then pay back the bank and retain a handsome profit in the amount of $52,429.60. The lender, however, is not done with the deal.
4. The lender, who signed over the Promissory Note to the investor at the time of the trade, did not sign over the lien document. The State of Kansas Supreme Court addressed this issue and stated that such a transaction was certainly legal, however, it created a fatal flaw in that, the holder of the lien document, at time of sale of the security instrument, received consideration in excess of the lien amount, and therefore, the lender could not be harmed and the lien became a void document.
5. This begs a question. If keeping the lien would render it void, why wouldn't the lender simply transfer the lien with the Promissory Note? As always, follow the money. The lender will hold the lien for three years, file an Internal Revenue Form 1099A, claim the full amount of the lien as abandoned funds, and deduct the full amount from the lender's tax liability. The lender, by this maneuver, gets consideration a second time and still the lender is not done profiting from the deal.
6. After the sale of the Promissory Note, the lender remains as the servicer for the investor. The lender will receive 3% of each payment the lender collects and renders to the investor pool. However, if the payment is late, the lender is allowed to assess an extra 5% and keep that amount. Also, if the loan defaults, the lender stands to gain a considerable amount for handling the foreclosure.
7. The lender stands to profit far more from a Note that is overly expensive in the first instance, then when borrower is slow to pay in the second, and in the third when the property ultimately goes into foreclosure, rather than from a good stable loan. And where, you may ask, does all this profit come from? It comes from the equity the lender convinced the borrower to invest in the new purchase, and still the lender is not finished profiting from the deal.
8. The last nail was driven in the American financial coffin on the last day of Congress in 1999, the Graham Bailey Leach Act (see Acts to briefly understand this act), was when they removed a restriction that had been in place since the economic collapse of 1907. At that time, investors were allowed to bet on stocks without actually buying them. This unbridled speculation lead directly to an economic collapse so the legislature banned the practice, until the year 1999. The money changers got their way on the last day, the last act of the session, when congress opened the process again and it took only 8 years to crash the stock market again.
9. The lender was still not done profiting from the loan he created as he was now free to bet on the failure of the security.
10. The unsuspecting consumer was lulled into accepting the pronouncements of the Real Estate Agents, the Lenders, Appraisers, Underwriters, and Trustees as all were acting under the cover of government regulation. Unfortunately, the regulations in place to protect the consumer from just this kind of abuse were simply being ignored.
11. The loan origination fee from line 801 of the HUD1 settlement statement is the finder's fee paid for the referral of the client to the lender by a person acting as an agent for the borrower. Hereinafter, the person or entity who receives any portion of the yield spread premium, or a commission of any kind consequent to securing the loan agreement from the borrower will be referred to as "Agent." The fee, authorized by the consumer protection law is restricted to 1% of the principal of the Note. It was intended that the Agent, when seeking out a lender for the borrower, would seek the best deal for his client rather than who would pay him the most. That was the intent, but not the reality. The reality is that Agents never come away from the table with less than 2% or 3% of the principal. This is accomplished by undisclosed fees to the borrower in order to induce the Agent to breach his fiduciary duty to the borrower and convince the borrower to accept a more expensive loan product than the borrower qualifies for. This will generate more profits for the lender and, consequently, for the Agent.
12. It is common practice for lenders to coerce appraisers to give a higher appraisal than is the fair market price. This allows the lender to increase the cost of the loan product and give the impression that the borrower is justified in making the purchase.
13. The lender then charges the borrower an underwriting fee in order to convince the borrower that someone with knowledge has gone over the conditions of the Note and certified that it meets all legal criteria.
14. The entire loan process is a carefully contrived connivance designed and intended to induce the unsophisticated borrower into accepting a loan product that is beyond the borrower's means.
15. The trustee, at closing, participates actively in the deception of the borrower by placing undue stress on the borrower to sign the large stack of paperwork without reading it. The trustee is, after all, to be trusted and has been paid to insure the transaction. This trust is systematically violated for the purpose of taking unfair advantage of the borrower.
16. With all this, it should be no surprise to anyone that this country is having a real estate crisis.