Minus 0.5% Interest: Bank in Denmark will effectively pay qualified home buyers who take out a 10-year fixed rate mortgage

see Denmark Bank offers negative interest rate — how are they making money?

The answer is simple — the bank is not making money on the loan. It is making money by originating the loan. It is not making money by collecting interest, it is paying interest in exchange for the borrower’s signature. The bank is not taking any risk because the fees it collects from investment bank make it a lucrative deal for the bank, who doesn’t care whether the loan is repaid or not.

The bank losing nothing if the principal amount of the loan is not repaid because it has already sold the loan to an investment bank securitization scheme where the parts of the loan are sold resulting in proceeds of sales of the parts far exceeding the “whole” debt.

As I learned over the weekend in trying to explain what I am doing and my basic premise to a close friend who had no knowledge of finance and law the entire scheme is so counter-intuitive that it simply makes no sense to anyone who has not studied the subject. And nobody studies it unless they have reason for doing it.

A debt is a debt and a loan is a loan. But what if it isn’t?

In the mortgage meltdown era that started 20 years ago, borrowers were effectively paid to sign loan documents that reflected receipt of money in transactions that were called “loans” by the originators, sellers and facilitators who sold the more than 450  varieties of loan products to unsophisticated consumers, many of whom had no idea that they were signing away rights to a home that had been in their family for generations.

Those borrowers did not understand that they were being paid for their signatures, their reputations and their homes — and the information needed to make informed decisions and negotiate terms was being not only withheld but concealed.

The only difference between the American scheme and the Denmark scheme is that Denmark is upfront about it: “We’ll pay you if you will please sign these loan documents.”

In a world where information must be condensed into only a few words nobody takes the time to ask why any “lender” would do that or whether such a party could or should be allowed to pretend that it is a “lender.”

And certainly nobody is getting the information that would enable them to see that the transaction, disguised as a loan, is really and mainly a scheme to generate fees and profits through trading.

And not even the economists have taken much note of how this changes the “free market” notion that self corrects aberrant behavior. No correction occurred because the behavior was not aberrant. So borrowers could be and were enticed to sign papers that were not a  reflection of market forces adjusting for relative risk because one side — the origination side — had no risk.

Hence the advent of NINJA Loans. Repayment of a loan was incidental — not the point of the transaction. And that means it wasn’t really a loan. As long as that continues the entire financial system will be lopsided and the current system of predatory practices will be perpetuated — because there are neither governmental nor market forces in opposition to the investment banks.

This leaves both investors and borrowers in the silly position of being required to act as though they were — directly or indirectly — part of a loan transaction when in fact they had invested real capital and valuable property rights into a scheme in which they received either nothing or very little for their investment; and that is because neither the investors nor the borrowers actually knew and for the most part because they still don’t know the true nature of their investments and the legal rights they have for compensation for having been lured into an investment whose nature was unknown and where the parties to the transaction were both unknown and withheld.

At least in Denmark now negotiations have been opened. In order to restore “free markets” and the power of free market forces, we need to remove the impediments to the flow of free markets caused by severe asymmetry of knowledge. The borrower can now say,

“OK you are going to make a pile of money off of this deal, and you are offering 5 cents out of $11.00 in gross revenue. You can’t do the deal without me. So I want 50 cents. It’s in your interest to give me the 50 cents because that will help me pay the contractual payments in order to maintain the illusion that a single debt exists instead of hundreds of disparate parts that used to be the debt. If you don’t accept my counter offer I will find someone who will accept it. Or maybe I can find someone willing to pay me $1.00.”

Here is what is needed: Changes in the policy of enforcement as to unfair trading and dealing, securities violations, income tax violations and false reporting of assets and income. In any society the object is to protect and secure the rights and privileges of the people — not the corporate behemoths who regard the people as food.

All borrowers in all deals that are actually securitization schemes should have full disclosure regarding the fees and profits (as already currently required but not enforced under the Truth in Lending Act) so that they have their right to know the party with whom they are doing business and the ability to choose between vendors or purveyors of these securitization schemes and at least have the knowledge needed to effectively negotiate compensation. That was the whole point of TILA.

When the markets are not actually freely operating, free market forces cannot be in play. That is the point of government — to make the players act according to the rules to preserve free market flows, information and natural forces propelled by self interest.

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