Part Four: Epilogue

Unfortunately, rate gouging to maintain margins is common practice for finance-based companies. They hold everyone hostage by controlling the money, charging for doing it, and penalizing you past your means if you get behind.

I don’t know, that sounds like extortion without the broken limbs, to me.

And that “new deal at the table” thing sounds like fraud.

Holding my deposit and bouncing a check against it, then charging $35?

Sounds like embezzlement, at least.

Raising interest rates and charging fees at will, pushing a debt to unpayable limits? Isn’t that loansharking?

And yet, Detroit automakers, their sales killed by these factors ruining their client base financially, are assailed for their gall in asking the government for 1/7th of what AIG has already received and blown.

GM and Chrysler make something we use. Many of us like their cars. AIG just charges premiums and bets it all on Wall Street. Which one is useful and which is self-serving? And which is being criticized for needing help while the other gets Pentagon-level funding with no strings attached?

Why not give all of AIG’s dough to Detroit? Tell them to have 50 miles per gallon alternative fuel cars and an average new car price of $10,000 in 7 years. They would do it, I’m sure. Ford would even pony up to the trough to stay up with the rest.

$180 billion is an obscenely huge amount of money. Almost any manufacturing industry on earth, short of military suppliers, could advance exponentially with that kind of funding from the government. Give it to World Health Organization and the whole planet is up to it’s knees in food. Give it to aids or cancer research and we see cures in our lifetimes. Give it to NASA and we’re practically on Mars.

Or, offer it as a refund incentive to mortgage companies that willingly reduce principle and interest to insure that homeowners can make their payments.

If “Mary’s” mortgagor was getting $50-100,000 of that $180 billion in return for adjusting her loan down to $180,000 at 4%/40 years, that would be just fine with people and “Mary” would be just fine, too.

The Fed could have said “Ok, folks – everyone who drops to 4% fixed APR and absorbs principle on upside-down loans and interest from payment arrears can claim those losses from this fund”.

There would be no foreclosure crisis and little complaint from most folks if the ‘bailout’ was based on saving people’s homes and livelihoods by capping interest rates and re-imbursing lenders for the lost principle.

That’s not what the bailout accomplished.

It’s company’s margins and share prices that were restored. Their value at – where? The Wall Street Casino.

It would not be unfair, un-American or communist to suggest a temporary federal hold on interest rates. All lenders and credit companies could be limited to 4 or 5% interest for a specific period of time. That would allow people to catch up and stabilize themselves financially. Then interest rates could start with a clean slate and rise or fall more naturally with the economy as it recovers.

Thus, helping the companies that we live on further reduce the cost of living for everyone by increasing quality and lowering prices. If everyone can afford to live, it’s likelier they can spend, too. If people can work things out to stay on track with their debts and expenses when times get rough, they’ll make it through to the next good time, and be all caught up.

And, when times get bad for the market, it’s those top-level execs and shareholders who own the business, like any small business owner, who owe it to the company to eat the margin if they have to in order to maintain stability.

But this isn’t about stability. This profit margining behemoth is motivated only by immediate gain and has little or no concern about longevity.

What about this current recession/depression does not stem from these financial practices?

We’re talking about a free market economy, right? Capitalism? Supply and demand? Fair market value? Free and fair trade? Is this really the way that’s supposed to work?

Strong-arming us with price hikes, penalties and fees, paying huge salaries and bonuses, and claiming billions in losses as they do it.

Getting their hooks into us with a small legitimate debt, and turning the screw as soon as we mess up.

No, not a scene from the “Sopranos”.

The epitome of organized crime – crime for sheer profit above all else, with no regard for human life or welfare, is not a bunch of mobsters.

It’s the money guys in the black silk ties.

You can see them. There’s a tour.

It’s called the Wall Street Casino.

Open 9:30am-4:00pm ET Monday through Friday.

 
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Return to the beginning – Part One: Genesis
 

Part Three: They Get Us Where We Live

In the housing industry, it all comes together – every form of margining, gouging, and fee wrangling takes place in the cavalcade of paperwork and fine print the unwary homebuyer faces.

Here’s how it works.

“Ed” watches some house-flipping show on TV.

He’s fascinated and thinks he can easily pull it off. The housing market is hot, and he’s sure he can fix up and sell a house in a couple months or less. Big dollars!!!

Ed has $50,000 in the bank. He finds a fixer-upper for $150,000. He has to put down 20% to get his loan at 6% and 3 points ($4500), and puts $10,000 into making it sellable. That climbs to $25,000 as the infirmities in the house are discovered.

Now Ed is $9500 in debt and has a mortgage payment on the spec house. He puts it on the market at $275,000, the same price range as other houses in the area. He wants his margin. But, a glut of houses for sale in his neighborhood drive the price down near $200,000 and his is not selling. So he decides to drop the price to $250,000 and rent it in the meantime for market value, almost double his mortgage payment. Tenant after tenant gets behind on the $1400 rent and has to be evicted, often leaving damage in their wake.

It goes on for like this for 6 months.

“Mary” wants to buy a house in Ed’s neighborhood. His is “just right” for her, but she can’t afford it. He was looking for something around $150,000. But she really loves it. Her bank won’t come up, and she only has $20,000 to put down. She can’t afford more than $1000 a month payment, tax and insurance included.

She’s talked to several real estate agents. Many told her there won’t be anything she wants in her price range – that she should lower her sights. One, though, insists that she can afford Ed’s house, even though her bank won’t touch it. He tells her he can recommend someone.

He insists – “we will get you into the house”.

Mary goes to the agent’s chosen mortgage broker, who also assures her that she will get her dream house. The sale price is the full $250,000. She is offered a typical 30 year mortgage at 5% fixed with 1/2 point loan fee. He quotes her $1200 without T/I. She says it’s too much. He says he’ll “come up with something”.

Weeks later, he calls Mary with a solution. He can get the principle down to under $1000 if she puts $70,000 down. She reminds him she only has $20,000 to put down. He says she can borrow the rest of the down payment for an extra $75 dollars a month.

And, he chimes, “you’ll be in your dream house.”

Mary agrees and he puts the loan in to the bank. He sets a closing day for July 1st. Her lease is up at the end of June, and the landlord won’t budge, so she has to move into storage anyway.

The paperwork takes longer than expected, so with her things in storage, Mary has to live in a motel for a 8 days waiting to close on her dreamhouse. When she gets to the pre-closing meeting, she suddenly finds herself in the Twilight Zone, beset with a mountain of new, horrifying contracts and numbers.

She is now looking at 8% interest variable up to 17%, $1320 PI per month, with 3 points down – $7,500, and a second mortgage for the downpayment – 20 years at 9% for $400 a month. Her combined payments with tax and insurance top $2000 a month, and she has to pay almost $29,000 at closing.

So, she has to take it because she works out of her home and can’t do business from a motel room. She rationalizes that she can rent a room, make some cutbacks – she still has $10,000 in the bank. She’ll just have to make it work. She will surely go broke being unable to work and paying for hotels and storage while looking for another house.

You see, Mary had only a $40,000 inheritance in the bank. She was counting on getting a mortgage lower than her current rent, and still having $20,000 security in the bank.

But, the mortgage company required Mary to show them that bank balance, as well as her credit and income. They decided after seeing the $40,000, her income of $30,000 a year, and a good credit score that Mary would be an ideal target for the maximum margin – she could be expected to somehow make the payments at that rate – at least until the $40,000 ran out.

All this time, Ed has seen his debt escalate as his maintenance of the house and tenants continues to worsen. Finally, he’s so far in debt and tied up maintaining the renters that he gets behind on the mortgage.

In the 7 months it’s taken Mary to figure her finances, decide to buy, find a neighborhood, find Ed’s house, apply for the loans and close, Ed has lost it to the bank. They foreclosed on the $120,000 loan and that’s who Mary is buying it from now.

For $250,000.

The agent makes 7%, $17,500, and the bank that foreclosed on Ed nets over $150,000.

Neither the agent nor the mortgage broker suggested offering less money for the house. They both wanted their maximum return.

So, in a years time -

Ed lost his entire $30,000 down payment, spent the other $20,000 and rang up an additional $12,000 in credit debt over the course of the project. Eventually it put him behind in his own home mortgage, and when he was laid-off from his job, he ended up losing his home.

Mary held on until the savings ran out and business slumped. A roommate could only be expected to pay about $500 a month including utilities. Making matters worse, house prices in her neighborhood plummeted farther, below $200,000, leaving her seriously “upside down” at $230,000 in total loans. Losing the house was inevitable.

Well, it shouldn’t have been. This is the kind of mess you end up with when margining rules every step of the way. Had Ed been offered and willing to take $200,000 and the bank willing to give Mary 5% @40 years with a 1 point loan fee, she could easily have made it and Ed would’ve collected $65,000, even after paying the agent. And he wouldn’t be in severe debt causing him to lose his own home.

But, everyone had to have the biggest piece they could along every step. From the mortgage companies to the title brokers to Ed’s credit cards, everyone wanted their maximum profit margin, right now.

Ed was trying to play the casino games, like the big guys on TV. He willingly took the risk, knowing he might lose, but not really believing it. Like many people, he was attracted to the golden apple of big money, portrayed all too often on TV as easy pickings. He got in over his head by rushing in as soon as his bank said “yes”. So many doing it – it must be a sure thing. Turns out, it’s not always so.

Only one person was margining for the right reason. Mary. The consumer. She was budgeting. She tried to increase her chance of maintaining cashflow by reducing her cost without having to charge more for her services. She was trying to obey the marketing rules. This is normal, healthy margining.

But the money monsters had both of their numbers all along. If you want it, you gotta pay for it.

Everyone involved marginalized Ed and Mary to the limit for the sake of immediately collecting cash that “we know you have”.

Gotta keep that margin up.

Ooh! Gotta run. The Casino’s open!

 
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Read Part 4: Epilogue
 

A frog goes into a bank and approaches the teller.
He can see from her nameplate that her name is Patricia Whack.
“Miss Whack, I’d like to get a $30,000 loan to take a holiday.”

Patty looks at the frog in disbelief and asks his name.
The frog says his name is Kermit Jagger, his dad is Mick Jagger,
and that it’s okay, he knows the bank manager.

Patty explains that he will need to secure the loan with some collateral.

The frog says, “Sure. I have this,” and produces a tiny porcelain elephant, about an inch tall, bright pink and perfectly formed.

Very confused, Patty explains that she’ll have to consult with the bank manager and disappears into a back office.

She finds the manager and says,
“There’s a frog called Kermit Jagger out there who claims to know you and wants to borrow $30,000, and he wants to use this as collateral.”

She holds up the tiny pink elephant.
“I mean, what in the world is this?”

The bank manager looks back at her and says…

“It’s a knickknack, Patty Whack. Give the frog a loan.
His old man’s a Rolling Stone.”

(You’re singing it, aren’t you?…)