degs, you are way over your head. You don't know mortgage banking. You don't know what happened in the financial meltdown. And you don't understand the core issue in this particular discussion... what was the nature of the losses written off by Wall Street banks 2006-2007-2008.
BTW, I never saw a 3 year balloon. I think you meant ARM. Either way, what would adjusting interest have to do with property being underwater?
underwater is when market value is less than the principle owed on the loan. Now here's what you don't get. Homeowners are underwater, not Wall Street banks. Wall Street banks do not owe anybody money for the property they own. How can they possibly be underwater? They can't. Wall Street banks purchased loans from Lenders; they paid principle plus a yield spread premium... at that point, if they held the loan, they own the Note for the amount they paid for it. The homeowner owes the Wall Street bank, not the other way around. The bank has an investment, an asset that goes on their books. Just like the Treasuries they own, they lend money on this asset/reserve. Now... first off, realize that, Wall street banks are the secondary market, so they hold the paper... who held the most mortgage bonds in America? Goldman Sachs, followed by Lehman Brothers, followed by Bear Stearns. Now let's say the borrower stops paying on the loan and the bank forecloses the property... at that point the bank no longer holds a debt in asset/reserve, because the debt is destroyed in the foreclosure, meanwhile the property is transferred to the Bank. So now, the bank holds the property in asset/reserve. Same difference. The bank goes right on loaning ten times the amount of the asset (prior to the collapse they were loaning 30 times) ... understand? the bank doesn't lose anything in foreclosure, except the cost of foreclosure. Since those were jumbos that went to Wall Street, we are talking one million in property value, and maybe 5% loss to foreclosure costs, but the whole million remains in asset/reserve and ten to thirty million gets loaned out against it. Or they could go the the FED discount window and borrow ten million against the property if they needed capital. Still think foreclosure was the cause of those ten billion quarterly losses posted by Citibank? Are your little eyes starting to open? I know banking degs, you don't.
Okay, remember the huge fuss over mark-to-market? That was major important to the secondary banks because if those values dropped 30%, it would have reduced the asset/reserve numbers, big time. But remember how they solved that? they cheated, big time. They said they didn't have to mark-to-market unless they sold the property (duh- the sale is the value) ... so they held market value on their books right where it was when they purchased the loans. Once again, the banks were not hurt by the mortgages.
Fraud, on the other hand, had to be totally written off. The entire price they paid for the loan, with no rescue from title insurance... that's where the big losses were happening.
As for the rest of your confusion...
First off, the Note is a bond. You don't seem to understand that. Next, the Loan can be bought and sold like any other debt... that does not make the original loan process equal to a sale. A borrower is not buying anything, he is borrowing. I know you know this, but you persist in this twisted logic. No matter, money loaned is not sold. The borrower pays for processing fees, which is not equal to buying the loan. The borrower does not purchase money from the bank, he borrows money from the bank. A Loan assesses interest according to credit risk... not according to how much money a salesman can swindle from a borrower. Your assertions are both illegal and absurd.
You don't seem to know anything about mortgage banking. This is a
1003. It was always 4 pages when I did loans. they changed it, now it runs five or six pages. Whether you do FHA or not, you use that form. The single biggest risk assessment an individual goes through in their lifetime is the mortgage loan process. That process assesses the risk of that loan. It is the heart and soul of what banking is. I know, I was a banker... not a lawyer.