Your Housing Nightmare: Here It Comes?

09-19-2010 • Market-ticker.denninger.org/

This is a theory, for which I cannot currently provide closure and certainty on. So don't "take this to the bank" - but do take it as a possible explanation, and if it's happening, the fraud being perpetrated is so dark, and so pervasive, as to literally blow all of the major institutions involved straight to Mars. When a loan was made during the "go-go" years it was typically funded via a warehouse line somewhere. Some lenders had their own, some funded via the FHLB banks (e.g. Countrywide), some funded via warehouse lines from the major banks such as WaMu, JPM, Citi and Bank of America. These loans were then bundled up. Some were sold to Fannie and Freddie, some (the non-conforming ones) were not. But all were then packaged into securities, tranched and sold off. So far we all "get it." Well, someone has to service those loans. And here the major banks all got their fingers in the pie. A "servicer" is simply the guy who takes your payment every month and distributes it to the MBS holders as provided for in the master trust agreement that governs the MBS you bought. That agreement specifies who eats what if things don't perform, how loans can be modified and if they can, and so on. Normally, when everything is going well, being a servicer is a license to print money, because the servicer gets to deduct a small piece (a few basis points) from every payment. But when things go poorly, the servicer can either make money or lose it - and the losses can be material.