2009-02-23 — ml-implode.com
... all of this is moot if you just watch their own training video. In it, you can see very clearly how World Savings trained its brokers to obscure the true nature of their product. When the actor role-playing a loan applicant asks clearly if picking a minimum payment would cause the loan’s balance to grow—the key feature of negatively amortizing option ARMs as I’m sure you’d agree—the actor role-playing the loan officer dodges the question: “It’s optional,†he says. The answer, of course, is yes!
By the way, it’s worth noting that World Saving’s option ARMs were the most toxic brand available. The typical option ARM allows negative amortization to grow for five years or until the loan balance reaches 115% of its original amount. But the Sandlers’ option ARMs allow the loan balance to grow for 10 years or to 125% of the original amount. As I’ve said before on my blog, in allowing negatively amortizing minimum payments, option ARM lenders effectively gave borrowers rope to hang themselves with. Understood this way, World Savings was giving its borrowers a noose tied to the end of a bungee cord…
source article |
permalink |
discuss |
subscribe by:
|
RSS |
email 
Comments:
Lowdelta at 02:36 2009-02-24 said:
The real culprit here is this accounting for Savings and Loans, Savings Banks, Banks, etc. that is known as "Gap Accounting"! Under gap accounting rules these pay option arm lenders get to actually "book" the FULLY INDEXED RATE on a pay option arm! That means of course that even though the borrower is making the min payment (1.00-1.25%) the bank is booking as income the fully indexed rate of 6.500 to 7.750%! So, once again who is to blame for these institutions that fail.....your government through the regulators that's who! If this type of "sham" accounting was not allowed to flourish none of this would be a problem. Of course, the Sandlers also would not have been able to sell World for such a premium either! PermalinkGeorgetown at 03:51 2009-02-24 said:
Yes allowing institutions to recognize as income amounts that were not real was an error but this led to a overstatement of income not the eventual failure of thousands of loans. The opaque structure of these instruments and the less than transparent manner they were sold is much more central to these failures. There is a good deal of blame to go around. The inventors of these loan products, the salesmen who pushed them, the street firms that packaged them, rating agencies that understated the risks, modelers who thought they knew better, banks who loaned investors the money to buy the risky instruments, accountants who urged the unwinding of reserves while making balance sheets more volatile due to mark-to-market, and regulators who mumbled their faith in free market deregulation while ignoring their responsibilities to an orderly and transparent market. Which of these is the greater offender? Permalinkadd a comment | go to forum thread
Note: Comments may take a few minutes to show up on this page. If you go to the forum thread, however, you can see them immediately.