Giant Pool of Money

…And So It Began

Back in May of 2008, NPR aired an episode of This American Life entitled “The Giant Pool of Money,” which aimed to inform listeners of how the housing crisis started. Now, I’m not actually going to get into what the “giant pool of money” is, but you can listen to the entire episode here.

In the beginning of the episode, one of the show’s hosts brings up a situation involving a man named Clarence. Clarence had been working 3 part time jobs and was pulling in about $45,000 a year when he came across some rough times and needed some cash. Lucky for him, his lender let him borrow $540,000 against his house – and they did this without even verifying his income! Let’s put this into perspective. Spread out over 30 years, and at 6% interest (a near best case scenario) Clarence would be making monthly payments of around $3,250 a month. Now, let’s look at his income. Clarence makes $45,000 a year. Even if just 10% of Clarence’s paycheck went to taxes, he would only end up with $3,375 a month take home pay. That would leave him with $125 a month for EVERYTHING else – food, clothes, utilities, medical bills – everything. Obviously, Clarence was doomed to default on his loan from the very start.

The question then is this: why would a lender offer to loan an individual this much money? Well, I’m going to briefly explain that right now.

A few years ago, mortgage backed securities became the hot new investment. In short, this is how it works: First, a mortgage broker gives a person or persons a loan, then turns around and sells it to a small mortgage company, who then sells it to an investment firm. These mortgages are then chopped up, bundled together, broken down into shares, and sold to investors as mortgage backed securities. These investments were considered low risk, and were generating a lot of profit for the purchasers, which of course made them very desirable. In fact, they started to become so hot that pretty soon brokers and investment firms were running out of mortgages to sell! That’s when the lending restrictions started to loosen up, and continued to loosen until all you had to do state your income and assets and the bank would take your word on it and hand over a shiny new loan. Verification? Not necessary!

And so it went for a few years – people were being given money that they wouldn’t be able to pay back. During this time house prices kept increasing and many people stayed afloat by taking out home equity loans on their homes. Then… the bubble burst.

I’ll continue on in my next blog about the bursting bubble, but this is really where we come in. Many of you have been the victim of predatory lending, including being talked into borrowing more than you needed or taking on adjustable rate mortgages (ARM) without knowing the ramifications of either. Chances are, you’ve also been affected by the extreme decrease in home values. On top of those, you may have additional burdens that are forcing you to default on your mortgage (loss of a job, divorce, forced to relocation, disability, etc).

Call us – we can help. We will never ask you for any money, never ask you to make any repairs, we will keep all of your information confidential, and we will work harder than anyone else to permanently solve your Michigan foreclosure.

Holly

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