By San Antonio Express-News/New York Times, by Louise Story Nov. 22, 2009
As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess.
Investment funds are buying billions of dollars worth of home loans, discounted from the loans orginal value.
But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies such as the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new government insured loans to other federal agencies, which bundle the mortgages into securities for sale to investors.
While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government and, ultimately, taxpayers.
For instance, a fund might offer to pay $40 million for a $100 million block of mortgages from a bank in distress. Then the fund could arrange to have some of those loans refianced into mortgages backed by an agency like the FHA and then sold to an agency like Ginnie Mae, a government owned corporation within the Housing and Urban Development Department, which guarantees investors the timely payment of principal and interest on mortgage backed securities backed by federally insured or guaranteed loans.
The trick is to persuade homeowners to refinance those mortgages, by offering to reduce the amounts the homeowners owe.
The profit, comes when the refinancings reach more than the $40 million that the fund paid for the block of loans.
Reference:
Page 9 of the Sundays Express News, November 22, 2009.
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