By Randall Kelton

Predatory schemes steal the equity of this country.

In the late 1980s and early ’90s, Presidents Bush and Clinton, under the guise of making housing available to the poor, eased regulations intended to ensure that consumers were protected from predatory lending practices. This deregulation had the effect of unleashing the money-changers on us all.

Instead of making fair, affordable home loans—for affordable houses—available to the low-income working poor, lenders used their new license to convince people to do the one thing that had always been taboo: speculate with their homes. They were persuaded to sell out their safe mortgages and invest their equity in more expensive homes, hoping that a perpetual housing boom would make them rich.

Around the same time, investors created ways to convert consumer mortgages to long-term securities that they could then sell to retirement investment funds. This led to a whole new mortgage and investment scheme.

Companies using “bank” and “mortgage” in their names secured large loans from major banks, used that money to generate consumer mortgages that consumers couldn’t afford—a typical predatory lending practice—, and then sold those mortgages to investors.

In order to secure profitable loan products, the lenders charged false fees to the borrowers at closing, like administration fee, document-processing fees, funding fees, and so on. These fees were then used as sweeteners to get the loan brokers to breach their fiduciary duty to their clients by convincing the buyer to accept an overpriced loan product.

The lender would then sell the loan to an investor and retain a hefty profit, but that was not all. The lender then becomes the servicer and collects the payments for the investor, retaining three percent of the amount collected, unless the loan was paid late, in which he charged and kept an extra five percent. Neither lenders nor investors had an interest in seeing the loan be paid off in the end; in fact, it was in the lender’s interest that you pay late, so he would collect higher fees. If the loan did default, the lender would orchestrate the foreclosure, undersell the property, flip it, and make around 20 percent over the sale price of the home.

The lender, after writing the note he intended to default, would secure eight to 10 insurance policies on the properties, called “derivatives,” wherein the lender would bet that the loan would fail. When it did, he would collect eight to 10 times the amount of the principal.