The 2008 financial crisis, triggered by the collapse of the subprime mortgage market, remains a stark reminder of the devastating consequences of predatory lending practices. One particularly insidious type of loan that contributed significantly to the crisis was the 80/20 loan, also known as a “piggyback” loan. This article examines the history of 80/20 loans, their role in the 2008 crisis, and their disturbing resurgence in a new form, exploiting the rising housing market and inflicting hardship on homeowners.
Understanding 80/20 Loans
An 80/20 loan consists of two separate mortgages — a first lien for 80% of the home’s value and a second lien for the remaining 20%. This allowed borrowers, often with weak credit scores, to purchase a home with minimal down payment. However, it also exposed them to significant risk.
The 2008 Crisis and the Fall of 80/20 Loans
The deregulation of the mortgage industry in the early 2000s, coupled with aggressive lending practices, led to an explosion of subprime mortgages, including 80/20 loans. These loans were often packaged into complex financial instruments known as mortgage-backed securities (MBS). When the housing market began to decline, homeowners with subprime mortgages, unable to afford their payments, defaulted in large numbers. This triggered a domino effect, leading to the collapse of the MBS market and the 2008 financial crisis. Mortgage-backed securities (MBS) and synthetic collateralized debt obligations (CDOs) played a significant role in the 2008 financial crisis. While both are complex financial instruments, understanding their differences and how they interacted is crucial to comprehending the crisis.
MBS are financial instruments created by pooling individual mortgages and selling them as a security. This allows investors to buy a piece of a large pool of mortgages, rather than needing to invest in individual loans. Here is how it works,
Mortgages are originated by banks and other lenders. The mortgages are then sold to a special purpose vehicle (SPV), a separate legal entity created solely to hold and manage the assets. The SPV issues MBS with different risk profiles, known as tranches. These tranches are prioritized for payment, with senior tranches receiving principal and interest first, followed by junior tranches. Investors purchase these tranches based on their desired risk-return profile. MBS provides liquidity to the mortgage market, allowing lenders to free up capital for new loans. Investors can diversify their portfolios by investing in different tranches of MBS with varying risk profiles.
Sometimes, though, you simply need to gin up the greed to astronomically high levels — like a casino. Synthetic CDOs are complex financial instruments that do not directly own the underlying assets, but instead use derivatives to gain exposure to them. In the context of the financial crisis, these derivatives were often credit default swaps (CDS) on MBS. Unlike traditional CDOs, which own the underlying assets, synthetic CDOs do not directly own the mortgages. To crank it up yet another level enter the Credit Default Swaps (CDS). The SPV enters into CDS contracts with other parties, essentially betting on whether the underlying mortgages will default. Much like Wall Street you have Longs and Shorts. Long CDS: If the SPV buys CDS, it profits if the mortgages default. Short CDS: If the SPV sells CDS, it profits if the mortgages do not default. Investors purchase tranches of the synthetic CDO, similar to traditional CDOs. Synthetic CDOs allowed investors to gain significant exposure to the mortgage market with less capital, potentially amplifying gains or losses. And finally, Investors could use synthetic CDOs to bet against the housing market, potentially profiting from mortgage defaults.
The Interplay and the Crisis
In the lead-up to the crisis, there was a massive boom in the securitization of mortgages, particularly subprime mortgages with higher default risk. Synthetic CDOs further amplified the risk by allowing investors to take large bets on the performance of the mortgage market, including betting against it. The complex structure of MBS and synthetic CDOs, coupled with opaque credit ratings, made it difficult to assess the true risk of these instruments. As the housing market declined, mortgage defaults soared. This triggered losses in both MBS and synthetic CDOs, leading to a domino effect and the financial crisis.
The Resurgence of “Zombie Mortgages”
While the crisis led to stricter regulations and a decline in new 80/20 loans, a disturbing trend has emerged in recent years. Many of the defaulted 80/20 loans from the crisis era were never properly foreclosed on and remained on the books as “zombie mortgages.” These loans, often sold for pennies on the dollar to investment firms, are now being aggressively pursued by new players. The resurgence of “zombie mortgages” has become a lucrative opportunity for certain investors, mainly hedge funds and private equity firms. These investors are using various tactics to acquire these defaulted loans at a fraction of their original value and then pursue foreclosure to maximize their profits.
Specialized funds are established to purchase defaulted or delinquent loans at deep discounts. These funds often have expertise in navigating the complexities of acquiring and servicing these loans. Investors may negotiate with servicers or government agencies to buy large portfolios of “zombie mortgages” at discounted prices. This allows them to achieve economies of scale and potentially acquire a wider range of properties. Online platforms have emerged where investors can bid on individual “zombie mortgages” based on their perceived potential for profit.
The key factor driving the profitability of “zombie mortgages” is the significant discrepancy between their current value and their original value during the 2008 financial crisis. During the crisis, housing prices plummeted, leading to widespread mortgage defaults. Many “zombie mortgages” became significantly underwater, meaning the outstanding loan amount exceeded the property’s market value. This made them unattractive to traditional lenders and investors.
Today, though, the housing market has witnessed a significant recovery in recent years. Property values have risen substantially, often exceeding their pre-crisis levels. This has created a situation where many “zombie mortgages” are now “in-the-money,” meaning the property value is greater than the outstanding loan amount. Investors who acquire “zombie mortgages” at a discount can potentially profit handsomely by pursuing foreclosure on the properties. By initiating foreclosure proceedings, the investor can force the sale of the property at auction. If the property sells at auction for a price exceeding the outstanding loan amount and associated costs, the investor can pocket the difference as profit.
The Human Cost of Predatory Practices
This resurgence of 80/20 loans is causing significant hardship for homeowners, many of whom have been struggling to rebuild their lives after the crisis. They face the threat of losing their homes, often through no fault of their own, to investors seeking to profit from the rising housing market. Take, for example, the deployment of inspectors by Mortgage Contracting Services and their subsidiary, GIS Field Services. For $5.90 per inspection, a person’s largest investment in their life could vanish. These National Association of Mortgage Field Services (NAMFS) members have armies of impoverished soldiers preying on the unsuspecting homeowner, trespassing on a daily basis, in order to facilitate their Client’s nefarious activities. In a recent NPR article on zombie mortgages, it was revealed that, “…a portfolio of approximately 9,000 loans was sold for $6,000.” Think about that for just a moment, 9,000 homes could be bought for less than a dollar each.
Where the Rubber Meets the Road
For years, people followed along as I exposed the lies about how the Industry was utilizing inspectors as debt collectors in order to circumvent the law. The Fair Debt Collections Practices Act (FDCPA) 15 U.S.C. § 1692 –1692p, generally states that mortgage servicers, in non-judicial foreclosures, are not bound by FDCPA and its Regulation Z. When firms like MCS and GIS Field Services order you to make contact, have phone calls made, and present documents, all bets could be off. And as many folks are now finding out, when the Prime Vendor gets sued, so to does the inspector. I know of three inspectors who have now had to file bankruptcy to protect their own assets against litigation as their insurance policies weren’t worth the paper they were written on. One of the biggest problems is that our Industry has zero regulation and even less than zero when it comes to oversight.
Even more problematic is the fact that many Prime Vendors are creating multiple reporting avenues from a single inspection. What used to be a handful of photos and a couple of questions now has become a total invasion of privacy. Demands for utility meter serial numbers is but one example of criminal trespass. The slippery slope Prime Vendors have gone down in their pursuit of unholy profits while placing the liabilities squarely upon the shoulders of Labor is an anti-trust conspiracy of epic proportions.
As early as 2013, Lisa Madigan, Illinois Attorney General, forced Safeguard Properties to pay $1 Million and enter into a Consent Decree over similar actions. And since then, tens of millions of dollars have been awarded to Labor for issues such as employee misclassification and breach of contract. Even worse, though, has been the fraud committed amounting to hundreds of millions of dollars against both Labor and US taxpayers. And it is becoming far worse, today. The reality is that no matter how many ways you try to package zero it still equals zero. And as we reveal this week, after multiple interviews with inspectors, many of them are leaving as it is below zero.
It is not going to end well. No amount of intervention, today, will change how things are done. At a time when Labor is at its lowest levels ever, and profits are at their highest levels since the turn of the century, the Industry has finally reached a point of reckoning. Where it will all end up, ultimately, will be up to the Courts. One thing is certain, though,
