SubPrime Mortgages Are Back – Is It 2008 All Over Again?

Apparently the biggest banks in the US didn’t learn their lesson the first time around…

Because a few days ago, Wells Fargo, Bank of America, and many of the usual suspects made a stunning announcement that they would start making crappy subprime loans once again!

I’m sure you remember how this all blew up back in 2008.

Banks spent years making the most insane loans imaginable, giving no-money-down mortgages to people with bad credit, and intentionally doing almost zero due diligence on their borrowers.

With the infamous “stated income” loans, a borrower could qualify for a loan by simply writing down his/her income on the loan application, without having to show any proof whatsoever.

Fraud was rampant. If you wanted to qualify for a $500,000 mortgage, all you had to do was tell your banker that you made $1 million per year. Simple. They didn’t ask, and you didn’t have to prove it.

Fast forward eight years and the banks are dusting off the old playbook once again.

Here’s the skinny: through these special new loan programs, borrowers are able to obtain a mortgage with just 3% down.

Now, 3% isn’t as magical as 0% down, but just wait ‘til you hear the rest.

At Wells Fargo, borrowers who have almost no savings for a down payment can actually qualify for a LOWER interest rate as long as you go to some silly government-sponsored personal finance class.

I looked at the interest rates: today, Wells Fargo is offering the exact same interest rate of 3.75% on a 30-year fixed rate, whether you have bad credit and put down 3%, or have great credit and put down 30%.

But if you put down 3% and take the government’s personal finance class, they’ll shave an eighth of a percent off the interest rate.

In other words, if you are a creditworthy borrower with ample savings and a hefty down payment, you will actually end up getting penalized with a HIGHER interest rate.

The banks have also drastically lowered their credit guidelines as well… so if you have bad credit, or difficulty demonstrating any credit at all, they’re now willing to accept documentation from “nontraditional sources”.

In its heroic effort to lead this gaggle of madness, Bank of America’s subprime loan program actually requires you to prove that your income is below-average in order to qualify.

Think about that again: this bank is making home loans with just 3% down (because, of course, housing prices always go up) to borrowers with bad credit who MUST PROVE that their income is below average.

[As an aside, it’s amazing to see banks actively competing for consumers with bad credit and minimal savings… apparently this market of subprime borrowers is extremely large, another depressing sign of how rapidly the American Middle Class is vanishing.]

Now, here’s the craziest part: the US government is in on the scam.

The federal housing agencies, specifically Fannie Mae, are all set up to buy these subprime loans from the banks.

Wells Fargo even puts this on its website: “Wells Fargo will service the loans, but Fannie Mae will buy them.” Hilarious.

They might as well say, “Wells Fargo will make the profit, but the taxpayer will assume the risk.”

Because that’s precisely what happens.

The banks rake in fees when they close the loan, then book another small profit when they flip the loan to the government.

This essentially takes the risk off the shoulders of the banks and puts it right onto the shoulders of where it always ends up: you. The consumer. The depositor. The TAXPAYER.

You would be forgiven for mistaking these loan programs as a sign of dementia… because ALL the parties involved are wading right back into the same gigantic, shark-infested ocean of risk that nearly brought down the financial system in 2008.

Except last time around the US government ‘only’ had a debt level of $9 trillion. Today it’s more than double that amount at $19.2 trillion, well over 100% of GDP.

In 2008 the Federal Reserve actually had the capacity to rapidly expand its balance sheet and slash interest rates.

Today interest rates are barely above zero, and the Fed is technically insolvent.

Back in 2008 they were at least able to -just barely- prevent an all-out collapse.

This time around the government, central bank, and FDIC are all out of ammunition to fight another crisis. The math is pretty simple.

Look, this isn’t any cause for alarm or panic. No one makes good decisions when they’re emotional.

But it is important to look at objective data and recognize that the colossal stupidity in the banking system never ends.

So ask yourself, rationally, is it worth tying up 100% of your savings in a banking system that routinely gambles away your deposits with such wanton irresponsibility…

… especially when they’re only paying you 0.1% interest anyhow. What’s the point?

There are so many other options available to store your wealth. Physical cash. Precious metals. Conservative foreign banks located in solvent jurisdictions with minimal debt.

You can generate safe returns through peer-to-peer arrangements, earning up as much as 12% on secured loans.

(In comparison, your savings account is nothing more than an unsecured loan you make to your banker, for which you are paid 0.1%…)

There are even a number of cryptocurrency options.

Bottom line, it’s 2016. Banks no longer have a monopoly on your savings. You have options. You have the power to fix this.

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6 Comments

  1. 400 million (A record) was put o the table by the Cabal of Banking, Brokerage and Insurance to remove… EVERY Republican signed the legislation and a few Democrats….. All of those against removal were Democrats… The Republicans had a veto proof majority… Rubin (A Republican) Treasury Secrtary, counseled Clinton to sign the removal, then left once the legislation was passed, for a million a year on the Citibank Board (he never attended any meetings). That lasted until a New York Times reporter broke the story recently….

  2. Actually, your belief that government happens in a vacuum is where you continue to get yourself lost. If you actually believe that everything that happens during a presidential administration happens only based on legislation and decisions made during that administration, then you are a neophyte who is out of his depth. Oh, and there were plenty of democrats who signed off on the removal of Glass-Steagall, including the biggest of them all at that point. Billy’s signature put it into law, regardless of the bleatings of you and the rest of the apologists. Economic outcomes are based on years and decades of bad decisions, a concept which continues to elude those of you who still bow at the altar of republican/democrat ideology.

  3. Joe,
    I thought you were smarter and more educated than that….. Your statement is NOT true… The Republican/Conservative Crash and Depression of the Hoover Administration in 1929 came after several Conservative Administrations. The Republican Revolution happened in 1981 and except for Clinton, that made made 20 years of Conservative Administrations before the Republican/Conservative Cheney/bush Crash and Depression of 2007.

    Let me try to make it simple for you Joe…. It has to with Banking and Financial Regulations….. The Democrats want them to keep the markets stable and successful. The Republicans, on the other hand don’t want those Regulations and that lack of Regulation has brought two Stock Market Crashes and Depressions in the last 100 years….

    You might want to familiarize yourself with the Glass-Steagall Act of 1933…. That came after Hoover’s Crash and Depression and it kept the markets stable for about 70 years. Then in 1999, the Republican Majority removed Glass-Steagall through what was called Gramm/Leach/Blyle, all powerful Republicans….. Within eight years of unregulated trading, the Crash of 2007 occurred…..

  4. Great point. Those crashes always come after several years of poor liberal decisions but after those libs have been booted from office.

  5. Michael, you have a short memory. There has NEVER been a Crash and Depression during a Progressive Liberal Administration, NEVER!… 🙁 They ALWAYS happen during Conservative Administrations with Conservative Majority Congresses after periods of Conservative Domination… 🙁 See the Conservatives screw thing us and the Progressive Liberals clean up their messes!… 🙁

  6. SO… THE BIG BANKS HAVE BEEN BORROWING FROM THE FED AT NEAR ZERO INTEREST RATES… AND LOANING THAT MONEY BACK TO THE FEDERAL GOVERNMENT… MOSTLY FOR LESS THAN 1% INTEREST, AND THUS MAKING A LITTLE BIT OF NET INTEREST INCOME. BUT NOW… THEY WILL BORROW FROM THE FED AT NEAR ZERO INTEREST RATES… AND LEND THE MONEY TO HOME BUYERS AT ALMOST 4%…. THUS INCREASING THEIR NET INTEREST INCOME BY A FACTOR OF ALMOST 10. HOW IS THAT CRAZY??? THAT IS WHAT THEY ARE SUPPOSED TO BE DOING… THAT IS THE WHOLE IDEA OF THE FED KEEPING INTERES RATES LOW. LET THE BANKS BORRROW CHEAPLY…. AND THEN HAVE THEM MAKE LOANS TO BUSINESSES AND CONSUMERS! IN EFFECT, THEY ARE LOCKING IN LONG TERM INCOME… MUCH THE SAME AS THEY WOULD BE DOING IF THEY BOUGHT GOVERNMENT BONDS! BUT… THE DEFAULT RATE WILL SOAR LIKE IT ALLEGEDLY DID DURING THE SUB-PRIME LOAN CRISIS, IDIOT AND GREEDY RIGHT WINGERS ARE SCREAMING! NO THEY WON’T! ORDINARY PEOPLE PAY THEIR BILLS… AND IF FOR SOME REASON THEY CAN’T, TE BANK WILL REPOSESS THEIR PROPERTIES, AND WILL MOST LIKE LOSE LITTLE IF ANY MONEY ON THE DEAL!!! MOST OF THE LOSSES DURING THE SUB-PRIME LENDING CRISIS WAS CAUSED BY…. WALL STREET SWINDLERS GETTING THEMSELVES EXTREMELY OVER LEVERAGED BY DOING IRRESPONSIBLE AND ILLEGAL AND STUPID STUFF!!! COVERING THE ENTIRE COST OF ALL THE SUB-PRIME LOANS THAT WENT BELLY UP WOULD HAVE COST LESS THAN A TRILLION DOLLARS…. AND NOT EVEN ANYWHERE NEAR THAT IF THE FEDERAL GOVERNMENT HAD STEPPED IN AND DID THE RIGHT THING, BY HELPING BORROWERS WHO GOT INTO TROUBLE IN THE RIGHT WAYS. INSTEAD, THE WHOLE CRISIS COST TE NATION MORE THAN 20 TRILLION…. BECAUSE IT HAD VERY LITTLE TO DO WITH SUB PRIME LOANS NOT BEING PAID BACK BY BORROWERS. IT MOSTLY HAD TO DO WITH MASIVE WALL STREET FRAUD, DONE USING RULES AND REGULATIONS PUT INTO PLACE MOSTLY BY REPUBLICANS… OR RULES AND REGULATIONS THAT WERE IGNORED BY REPUBLICANS WHO SHOULD HAVE NOWN THAT WHAT WAS BEING DONE WAS ILLEGAL… OR AT LEAST UNETHICAL!!! PUT THE BLAME FOR THAT CRISIS WHERE IT BELONGS… ON THE WALL STREET CRIMINALS AND THEIR MOSTLY REPUBLICAN ALLIES AND ENABLERS… NOT ON THE WORKING CLASS VICTIMS OF THOSE CRIMINALS AND SWINDLERS!!!

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