Real Estate & Mortgage 5 – Foreclosure Meltdown Fraud and Scams Dec08 – CDOs & Bond Rating Agencies
Part 5 (Excerpt)
CDO’s and the disgraceful actions of the Bond Rating Agencies
We just talked about the process regarding your mortgage lender and having “standing”, which is a legal term, which was a little complicated Dan. I’m not going to lie to you. That is why all the information is on the website, http://MortgageAnswerman.com And you can also go to VelocityFinancial.com. There is a link there to Dan’s website.
Dan is talking about breaking these mortgages down and eventually selling them off to Bangladesh in different tranches. Some of the servicers are actually in India, of all places. If you have a mortgage that you’re having trouble with and you need to call somebody to get help, you are actually calling India to talk to somebody about your mortgage here in Phoenix. I don’t really know why, but none the less, Brett, you wanted to address this from a financial advisor standpoint
Yes, I am pretty immersed in this because what Dan was describing in these collateralized debt obligations, CDO’s, CMO’s etcetera, does get a little complex. I think I can clarify it a bit as you may feel that this doesn’t apply to me, is this something I should consider in my own strategy. It works like this, this is true for most people who took out a mortgage in the last couple of years, you start your mortgage and get your payment book, and you are writing a check to Bank A, and then you get a notice maybe 30, 45 or 60 days into this loan that says “thank you for your business you are now writing your checks to Bank XYZ”, your payment to Bank XYZ. That is exactly what was happening.
When you slice the loans up this way, and you get it spun off.
Wall Street wanted their piece of profitability right? The mortgage industry was running rampant in terms of profitability. And so Wall Street says hey I want a piece of that and I know how we can do it we can sell mortgage backed securities, asset backed securities. Well they’re safe, that’s the way Wall Street was selling these to the investing public. Yeah they’re safe as long as housing values keep going up 15% a year, which is completely unrealistic.
It’s an asset class just like any other asset class. It’s cyclical, what goes up does come down in any investment asset class. So people wanted to put the blinders on, they paid no attention to that. As property values declined and all of these Wall Street Firms that are today bankrupt and are no longer in business, they were leveraging that debt, meaning they were borrowing more money to buy more debt.
So for this collapse, what is it all about, how does it affect you, the individual. How does it impact you the mortgage holder, it impacts you by saying does this strategy makes sense, should I refinance, can I get a better rate or should I look at a loan modification option. That’s the simple answer.
You go to the website and you do your due diligence then you call the guys at Velocity, the team at Velocity and you start working through the process, because I can tell you this from a financial advisory perspective. It’s all about efficiency; investment efficiency, tax efficiency, and interest rate efficiency. All these things are combined, and that is how you win the financial game, that’s how you stay ahead of the recession. That is how you create your own Velocity of Money, you have got to make the call. We have to look at these efficiencies.
So you’ve got all the way down to where the money is broken down. Dan explained it on a technical level. You kind of broke it down a little bit more that we actually got to the point of the CDO? Actually explained what the CDO represents?
Well yes, we did, the CDO is a whole bunch of mortgages that a rating firm decided all had the same credit class. Well let me ask you a question, I have heard a lot of buzz about these rating firms not having a standard
I will interject on that one because that is absolutely correct, the rating firms, Standard and Poors, Moody’s, Fitch’s. These are the companies that are responsible to call a security or bond or CDO as A paper all the way down to C paper. It’s actually rated all the way from AAA to BBB, the low rating. BBB is you’ve heard the term junk bond? They don’t call them that so much anymore. It’s not politically correct to say junk-bond, but you’ve heard them called high yield after Milkin went to jail, the scandals and all these things, so yes there is a politically correct spin that is associated with it. So now these rating agencies have been called into question, their objectivity, they’ve been called into question as to how they arrived at this rating, they’ve been called into question on all these things, so that investors are sitting out there saying okay so these ratings are bogus…
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