I'm sure that you saw on the news that good old Bank of America was going to drop interest rates on their home loans in Las Vegas down to 4.5%. The news presented this as Bank of America being the "good guy". My take on this is a lot different. I opened my first bank account with Bank of America in 1942, so we go way back. Just a week ago, I walked on the same spot where the very first Bank of America stood. It is now on the north end of First Street in San Jose, California, but back when Bank of America started, the town was named Alviso. It was the steam boat stop at the South end of San Francisco Bay about 25 miles north of San Jose.
To understand what the "fox" Bank of America is trying to do, you first have to have a basic understanding of home financing in the USA. The FHA and all the other alphabet soup agencies of our government are in the home mortgage business. They exist to make it easier for marginally qualified people to buy homes. Over the years after all qualified and marginally qualified people owned homes, the only people left were those who were not qualified. Our government then lowered the standards so that even unqualified people could buy homes. Now how does Bank of America fit into this? BofA is the loan origination agent for the government. They do the paper work for the loan and then hand it over to the government. As loose as the government is in accepting loans from BofA, they will not accept 2nd or 3rd mortgages. Nor will they accept interest only or sub prime loans. Banks like BofA made interest only and sub prime loans during the home price run up period and are now left holding them. Some were insured by AIG who tried to get a piece of the action away from the government, but did not have deep enough pockets. You know what happened to AIG.
Every time BofA made a loan, they booked a profit and the agent got a bonus. At first, you might think that BofA was stupid for doing what they did. How could they ever come out on making interest only or sub prime loans? Here is the punch line. Home prices were going up at a rate far higher than the interest rates so if they made an interest only loan on a home, in a few years the home would be worth 10% or 20% more than they had loaned out on the home. It was like the home owner had made a 20% or more down payment. BofA was secure. At the end of some period, the interest only loan would come due and the home owner would refinance to a standard loan and BofA would pass the loan on to the government. Everyone wins. In the case of sub prime loans, the home owner was letting some of the interest "ride" and would pay it back to the bank when he refinanced in the future. As long as home prices went up, the shell game worked.
To make matters worse, many home owners saw their home equity growing as the price of their home went up. This was money just sitting there waiting to be spent, so many took out 2nd mortgages or "home equity" loans and spent the money. They felt rich and spent the money like there was no tomorrow. I know people who have gone back to this well several times and you know where they are now. Who made these "home equity" loans? BofA and companies like Countrywide. It took Countrywide down, but BofA also have a lot of these types on loans on their books and can't get rid of them.
This is where this 4.5% deal for Las Vegas comes in. BofA is not holding many standard loans, they have passed these on to the government. What BofA is holding are mostly interest only, sub prime and 2nd and 3rd mortgages. The only smart way out of these is to convert them to standard loans and then pass them off to the government. Us tay payers. The government still has the low loan standards that will allow an unqualified person to take out a loan and BofA is counting on us tax payers taking over much of their bad loan portfolio if they can get the people of Las Vegas to refinance to this low special rate. Since BofA has access to money from the central bank at zero interest they can pull this off.
The banks don't want to foreclose on anyone and the government is even less inclined. The only reason the banks are foreclosing is the same reason we put bank robbers in jail. It is not to eliminate bank robbing, it is to discourage bank robbing. BofA is trying to discourage defaulting by foreclosing on a few. Right now the government stands to loose about a trillion dollars on the loans they now hold. If BofA and others are successful in what they are trying to do, us tax payers will be on the hook for a lot more than a trillion.
Remember that I told you so.
