Chicago Short Sales: How Wall Street Firms got rid of their risk on risky mortgages

Posted on August 12th, 2010 in All Articles, Short Selling/Buying.

Chicago IL – Bear Stearns was a survivor. It survived the Great Depression without laying off any employees. It survived World War II, and 9/11. What killed it off during a time of peace and relative stability?

Discover how other sellers successfully did a short sale and request a free consultation by clicking here.

The problem was that it had engorged itself on risky mortgages. In my opinion, the Wall Street Firms were playing a risky game. They would buy a risky loan from the original lender. They would pay a premium because of the high interest rate on the loan. They would then resell the risky loans for a profit.

They would sell the loans to the general public (most likely for more than they had paid for them.) They would take a package of loans and “securitize” that bundle. Here is an example of how this would work.

New Century Financial issues a loan to you. New Century then sells that loan to a Wall Street Firm, along with 900 other loans. The Wall Street Firm then takes that bundle of mortgages and “slices and dices” the ownership of them. They would sell certificates that represented ownership of a percentage of that bundle of loans.

Let’s say they had a bundle of 1,000 loans. They might sell 10,000 certificates. Each certificate holder would get some of the monthly payments. But, here is where it got even more crazy.

The Wall Street Firm would sell better quality certificates and lower quality certificates. They laid out guidelines, that if 10% of all the loans in the bundle defaulted, then the lowest quality 10% of certificates wouldn’t get paid any money at all. See how messed up the lending business has gotten?

It used to be that you got a loan from a local bank. That bank would expect you to pay on time. If you didn’t pay, then that bank lost money. They didn’t transfer all the risk to Wall Street or someone else. If they gave out bad loan, they lost the money personally.

With these crazy, engineered loans, the person losing the money could be anywhere in the world. Maybe in China, Dubai, or Norway. Or, the owner of the loan could be your co-workers Pension Plan.

CALPERS, which stands for California, Public Employees Retirement System, supposedly lost a lot of money on these certificates. I heard that they invested in these risky certificates. Why? They wanted to earn a better interest rate on their investments. When the housing market crashed the certificates they owned dropped in value.

Let says that you live in California and your mortgage was “sliced and diced” by Wall Street and CALPERS bought one of those “slices.” So they could own some of your mortgage. Your neighbor might have a CALPERS’s Pension, thereby owning a percentage of your mortgage. Sounds crazy, right?

There is a method to the madness. Tomorrow, I will explain how to determine if your loan has been “sliced and diced.” In addition, I will explain what that means to you if you are short selling.

Are you interested in selling your property as a short sale? Call me at (312) 953-6725 for a free consultation. When you call, I will explain how the process works in detail and answer any questions you may have. Discover how other sellers successfully completed a short sale and request a free consultation by clicking here.

Thinking about a loan modification? Our Chicago loan modification kit has the instructions you will need to get a loan modification approved with your lender. Click here to request a copy.

Thanks for reading this, Phil Buoscio.

Phil is a Real Estate Agent at Better Living Realty – Buoscio Brokerage, Inc..

Phone: (312) 953-6725. myrealtorphil@gmail.com.

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Phil Buoscio specializes in loan modifications and short sales in Chicago Illinois. Chicago Loan Modification Help. Chicago Short Sales. Chicago Short Sale Realtor. ChicagolandShort Sale Realtor. Chicago IL Short Sales. Chicago Realtor.

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