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Thursday, October 2, 2008

The wrongs of Predatory Loans, recognition of the true problem, a prescription to cure the foreclosure crisis and restore homes in America.

As I was visiting New Prospect Baptist Church in Northwest Detroit one Sunday morning, I ran into and talked with my Pasteur School Classmate Dwight Jones a friend of mine from “the old neighborhood”. We both grew up together in the neighborhood just 3 blocks south of 8 mile road and one block west of Livernois.

Dwight is a respected member of the community and currently serves his as an usher and Deacon at the church. Mr. Jones is a proud alumnus of Pasteur Elementary School just like me and we love the City. Brother Jones shared the same concerns that I had about the housing situation so much that he just blurted out. “Hey Cush, how did this foreclosure mess really get started and, what can we do about it to make it right?

Dr. Cush pondered a few seconds and started to break it down to him on how it happened. Basically we homeowners were sacrificed for investors and speculators on Wall Street and throughout the world. The way that they did it was through a process called Securities Derivatives. I explained to my good friend Dwight that a derivative is similar to a bet on a horse, these investors were betting that with the adjustable rate mortgages we could buy a debt for $10,000 and plan to make $4,000 from and to sell pieces of mortgages in an unprecedented way.

But how does that work? Dwight asked.

Here's how it works Brother Dwight. Let’s take the example of a homeowner on Santa Rosa St in Detroit purchasing a house with an adjustable rate mortgage for $100,000 from a lender. The lender sells the mortgage to Fannie Mae or Freddie Mac after the closing 3 weeks later for $150,000. A mortgage at 8% over 30 years at about $650 per month will yield approximately $350,000 in total payments.

Fannie Mae and Freddie Mac then sells the mortgage to Bear Stearns, Goldman Sachs, etc who creates the SECURITY a derivative which they sell to investors in bundles as a note or bonds. The insurance company (A.I.G.) guaranteed through insurance, as they do with mortgage insurance the derivative.


They sell pieces of the mortgage to investors. The investors are told that the mortgages are backed by insurance companies like (A.I.G.) and that their money is safe. Furthermore, the debt is backed by the homeowner’s property. Bear Stearns or Goldman takes the mortgage to 10 investors, each of them purchasing a piece of the $150,000 mortgage or $15,000 per person, hoping to make $10,000 or higher on the debt. These derivatives equal nearly $516 trillion dollars.

Some of the investors sell their piece of the debt to others who turn around and sell it again and again. This process is called securitization and carried as high bond rating because of the insurance.

To accomplish this, the speculators are would say that in 6 months, the price of property will be at set price more that what is was on a particular date. If it gets there, the investor gets paid a profit. If not then the investor loses money.

The Oil Men in the White House already delivered the nations liquidity to their cronies and now home values have plummeted like no time since the great depression.

They were all counting on the owner of the home to make that monthly payment on time every time for 30 years. The problem starts when the adjustable rates start kicking in and the tax assessment rises. The original $500 a month payment balloons to $1500 a month after 2 years. The homeowner ends up defaulting on the mortgage and the house of cards starts to fall.

The loan is in default, the investors cannot cover their ‘bet’, and the only hard asset that is left is the house itself. The bank forecloses on the property and kicks the people out in the street. The house is priced much more that what it is worth and it sits empty in the neighborhood. The bank takes a huge loss by having to sell the house at pennies for a dollar because the bank does not want to own the home. Meanwhile the investors are screwed out of their money and everyone loses.

These same investment houses speculate other hard assets like Oil, Wheat, Corn, and anything that people use every day. They live on creating and attempting to control the supply and demand through the use of current events in the world, weather, and regulating supply to manipulate the demand price to a higher level. In other words, it is a high stakes poker game with the homeowners being used as chips.

Brother Jones said a deep prayer and asked his old friend “What do we do to fix this situation”? This is a moral disgrace and a criminal act that has been taken against the people of my world! What can we do Brother George? Dr. Cush’s thinking cap went off with bells and whistles. He rubbed his chin and said this is the way to solve this problem.

I would introduce legislation to promote housing for the homeless through the use of State of Michigan and Federal assistance programs. No family without a home to call home. This would include funding set aside for repairs and bringing the property up to code.

If a working person decides to squat in an abandoned property and starts to live there, that person shall be given squatters rights of 60 to 90 days to bring the property up to code. I would also tie this in with Job apprenticeship training in fields of plumbing, home repair, home electrician, and roofing.

Then I would place strict regulations on the process of Derivatives. I would also demand that the Comptroller of the Currency resign immediately. Then I would ask the Federal House Judiciary Committee to start an investigation into the practices of the derivatives. And I would not stop there.

I support increasing the FDIC limit to $250,000 to protect the consumers. I would also advance changes in the credit reporting act to allow local and state courts to resolve credit reporting issues and modify terms of a homeowner’s mortgage based on income and assets. Then I would demand an inventory of all property taken by State, County, and Local agencies, including the land bank authorities.

Once this is all done Brother Jones, this would with God’s help and with all of us working together, we can begin to right this rape of America. My Mom and Dad always told me the rich do well under Republicans and we will do poorly. Boy has it turned out to be true!

1st things 1st, put people in the houses, give cash credit for sweat equity and let’s tackle the Homeless Families issues first. Let the people say Amen. And both of us did just that.

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