RISMEDIA, June 29, 2010—Because large financial institutions spend money on elections and advertising, they are able to control the dialogue and thus have been able to deflect any sort of accountability for the foreclosure epidemic they designed and executed.

Through their public relations efforts they have tried to make it seem like deadbeats have defrauded them and caused the collapse of the economy. They admonish us to honor our obligations even though they made it impossible for many to do so.

Then they roar off to the country club in their Bugatti Veyrons and their Maybach Zeppelins.

They actually have generated some sympathy by promulgating the old stereo-type of a prudent bank lending it’s own money to a working member of the community to purchase a home at a loan to value ratio that does not put the bank’s money at undue risk, and with a rate and terms that will not drive the borrower into default.

Today’s “too big to fail” banks are nothing like that, and the financial collapse of American households has been extraordinarily profitable for them.

In fact, they aren’t really banks at all; they would more correctly be defined as financial intermediaries. They are simply skimming middlepersons with no risk, no investment, and no skin in the game.

What they do is pass other people’s money back and forth, taking a little piece here and a big piece there. Then they select the right balance of good and bad loans to cause the pool to default and buy insurance that also pays them when the bad loans inevitably fail.

They make way more money on defaulted loan pools than they do on those that are performing. They are marketing machines, deliberately putting other people’s money at risk and then betting it won’t be paid back.

The only two limiting factors were the number of loans they could originate and assuring that the pools would have a sufficiently high enough number of individual loan defaults to declare the pool in default and collect on the insurance.

This could be achieved, in part, by creating loan products that would expand the market for money, pay higher interest, and have aspects likely to contribute to default.

In addition, by first inflating values and then driving them back down, a rising market allows for more lending; a falling market triggers more defaults. If you could rig both, you would have the perfect storm.

They undertook sophisticated studies to determine exactly what elements would contribute to a default, and then simply designed loan characteristics that would increase the statistical probability of default.

Historically, prior to the explosion of securitization, only about one percent of loans wound up in foreclosure. They couldn’t be certain that people would default in sufficient numbers to collect on the swaps so they designed the loan itself to fail, and then went hunting for people to trick into it.

And the success of their efforts cannot be denied with about 15% of mortgages currently in default, according to the Mortgage Bankers Association, the results speak for themselves.

When you say sub-prime loan, most people think of unqualified borrowers. That’s a total mis-direction. Many people with excellent credit were steered into sub-prime loans. The loan is designed to fail, deliberately targeted in a predatory manner, and represents a fraud upon both the borrower and the investor, neither of whom understand the true intent of the “bank.”

The bigger problem for these “banks” was the very finite number of potential borrowers.

Without debt, these financial intermediaries have nothing to sell and their business model fails. Conversely, the more debt they can sell, the bigger the bonuses. That creates a powerful incentive to package debt of any type by any means necessary.

If they only loaned money to the people who wanted it, there would not have been huge pools of mortgages to aggregate and sell off to investors.

In fact, many people don’t like debt. So, it was a business necessity to change that perception any way possible. The answer, of course, is marketing. Start them out with student loans and credit cards, and graduate them to auto leases and adjustable rate mortgages. Then flood the mail box with pre-printed credit card checks for $5,000 and $10,000, and a reminder that you can use the money anyway you want. And then, refinance.

If they hadn’t inflated appraisals in contradiction of their own value models, the default rate would have stayed near its historic level of about 1%, and there would have been no refinance boom.

If they only loaned something less than the real and true value of the security, there would be fewer strategic defaults.

If they only loaned money to people who were reasonably certain to be able to pay it back, they would not have reaped huge windfalls betting on the default of the loans they designed.

If only the rating agencies that financial intermediaries employ hadn’t lied about the quality of the pools, the scheme never would have gotten off the ground.

If they didn’t control the loan servicing, they would not be able to manipulate the number of loans needed to maintain the appropriate default level within the pool.

If they hadn’t conceived, designed, and written the prospectus, the pooling and servicing agreements and the loan terms, it would not have worked so well.

Other market expansion efforts include reusing the same loan documents to fund multiple pools. By digitally scanning and repackaging loan documentation, it is possible to sell the same debt into different pools.

In addition, documents could be submitted to more than one warehouse. Double and triple funding are only now starting to come to light as more court challenges are revealing irregularities, such as the Florida case in which there was more than one “Original” note.

Without predatory lending, there would have been far fewer mortgages to securitize, fewer bonuses, and far fewer foreclosures. The proof is in the documentation.

George W. Mantor is known as “The Real Estate Professor” for his consumer education efforts including a long-running radio program, monthly workshop series, public appearances, and frequent articles.

During a career dating back to 1978, he has amassed experience in new home and resale residential real estate, resort marketing and commercial and investment property.

Prior to starting his own real estate and mortgage brokerage in 1992, he had been Director of Training and Customer Service for Great Western Real Estate. In addition, he has served on virtually every real estate committee, including a term as a Director of the California Association of REALTORS.

George is a nationally respected authority on all areas of real estate and is frequently quoted in a wide range of publications. He is an oft invited guest of Fox Business Network and for many years, he was the host of “Keepin’ It Real…Real talk about the real thing, real estate” on KCEO radio.

The Real Estate Professional includes him in “a directory of the Nation’s outstanding authors, columnists, and speakers. His articles have also recently appeared in Real Estate Finance, The Real Estate Professional, National Real Estate Investor, Broker Agent News, and Realty Times. His blog is http://www.realtown.com/gwmantor/blog.

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