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A CHAT ABOUT HOME MORTGAGES -- 1/24/2010
By Martin Carbone
HOW ARE MORTGAGE PRICES SET?
(A) Prices on mortgages are set in the same way that virtually all prices on products and services are set
(1) The seller takes his direct cost of the product or service -- and;
(2) Adds in the indirect costs like taxes, rent, overhead and then;
(3) Adds what he thinks is a reasonable profit -- based on his knowledge of the market.
WHAT DOES MORTGAGE MONEY COST BANKS.
(B) The money they lend costs them nothing, zero, nada, bupkis, naught, zilch. a goose-egg --
not even a trifle. They have the right to create whatever they need at no direct cost because of their bank license.
WHAT ABOUT OVERHEAD?
(C) They have some overhead -- because they have to check out the credit of the borrower -- including the quality of their
collateral and they have to pay for some legal work and related paperwork -- but those costs are usually wrapped up in fees
that are borne by the buyer.
Once the loan is made -- the Bank does have to bear the expense of cashing the checks -- but the check clearing fees --
we are told is borne by the government in accordance with their deal with The Fed.
WHAT IS THEIR PROFIT?
(D) The bank gets to keep all the interest on the loan. For most mortgages -- the interest is roughly equal to the price of the
house on a 30 year loan.
HOW DID THE BANKS GET SUCH A SWEET DEAL?
(E) The bank's right to create new money arises somewhat indirectly through the Constitution that specifically and clearly gave
that right and obligation to Congress who then wimped out and transferred that hot potato to the Federal Reserve System
(illegally in my opinion) who then gave that right to their member banks. As a result -- common banks can (1) create any amount
of money through loans and (2) charge whatever the traffic will bear as interest on those loans.
ARE THERE RESTRICTIONS ON HOW MUCH A BANK CAN LEND?
(D) As far as I can tell, there are no restrictions on how much banks can lend -- except of course (1) the ability of a borrower to
pay the loan back, and (2) the existence of adequate collateral that can be seized if the loan is not paid back -- plus -- (3) rules
that prohibit banks from lending more than a certain amount of their total loans to any one borrower or related group of
borrowers and (4) rules that prohibit banks from lending more than a certain amount of money to employees or owners of the
bank and businesses or corporations controlled by the bank.
DO BANKS GET HELP FROM THE GOVERNMENT WHEN LOANS GO BAD?
(E) Certainly, the government provides the legal system that will enforce the terms of the loan contract.
WHAT SHOULD BE DONE IMMEDIATELY TO MAKE BANK LENDING SAFER? --
So we do not wind up with foreclosures.
(F) There should be specific and detailed laws that require all banks to rigorously perform "due diligence" when considering
making a specific loan to a specific prospective borrower. Those rules should be passed by Congress in formal legislation and
not be allowed to be set (or hidden) by various regulating agencies in their operational rules and regulations.
(G) Laws should be passed that will limit the profit banks make on lending money that is created in accordance with the
Constitution. 1% of the average loan amount balance each year seems reasonable to me as an upper profit limit -- as long
as that profit covers all loan-related expenses.
(H) Mortgage loans are the safest of all loans If due diligence is done by the lending bank with regard to only two easily
determinable things -- (a) the market value of the home and (b) the ability of the buyer to repay the loan -- the interest
on new mortgage loans can easily be reduced to 2 to 2.5 %. That will obviously revolutionize the American way of life.
(I) Why don't we get started tomorrow? Let this be your first call to action. The only group of people that will suffer are those
banks that are now holding mortgages above 2.5 %. Why should they be protected by from legitimate sensible competition? If we
energetically get started now, I believe we could solve all our economy's problems by the first of May of 2010 and start a wealth
boom that would expand to cover the entire world within five years.