The Palladium-Item has a story about federal charges against a mortgage broker with a screwy factual background. The broker’s world started unraveling when she, apparently, paid a couple of guys to rough up a real estate investor who was, if I followed the story right, the boss of the broker’s daughter.
Anyway, the broker is facing charges that she falsified loan application documents and took undisclosed commissions for selling higher interest rate loans. This highlights one of the factors that got us into our present real estate bubble induced financial mess. The incentive structures were all wrong. This woman’s incentives were all geared toward selling a mortgage, preferably at as high an interest rate as possible. The qualifications of the borrower were of no real concern to her since she had no long-term stake in the loan.
Once the loan closed, the mortgage broker coud take the money and run. Then the loan would be sold up the chain, packaged, and securitized. AIG sprinkles magic fairy dust on the product, “insuring” it with money AIG didn’t have, and some credit agency blesses it, turning it into a AAA security, and then pension funds pay top dollar for it. Presto! A figment of a corrupt mortgage broker’s imagination is now a bullet-proof investment opportunity, suitable for widows and orphans.
I think we need a chart that explains this – it reads like Mark Twain’s short story about how a man became his own grandfather!
The headline’s an eye-catcher. Yves Smith, over at Naked Capitalism, says the mindset for making these sweet deals for widows & orphans is nicknamed “I.B.G.-Y.B.G.” — “I’ll Be Gone – You’ll Be Gone.” I think that’s Enronian for “everybody loves a winner.”