Why Antitrust Legislation Should be Applied Against the mega banks

Oct 9, 2020

Securitization of data that is mischaracterized as securitization of debt has enabled the securities firms to write off the loan concurrently with funding it

I believe there is a very strong case for applying antitrust legislation against the big winners in the securitization game because they could and did apply multiple incentives to borrowers to accept loan products that were clearly losers from a business perspective. This blocked competitors who wanted to make real loans with real lenders and raised the risk of loss to consumers without any disclosure to the consumer, to government regulators or anyone else. All of this was performed at the same time that the risk of financial loss was entirely eliminated on any transaction with homeowners that was characterized as a loan.

The big securities brokerage firms acting as investment “banks” were able to fund loans and then sell securities that were completely dependent upon data released by the same securities firms about the performance of the data, as announced by the securities brokerage firm in its sole discretion. Effectively and substantively they sold the same loan multiple times. But nominally there was no reduction in the loan receivable account because there was no loan receivable account.

This effectively forced small community banks, credit unions and other lenders into the position of not competing — if they had offered the same incentives on real loans to homeowners, they would have suffered catastrophic loss. So they had to step out of lending, which would have been catastrophic or originate loans “for sale.”

The result was an undisclosed reduction of risk of loss for everyone on the “lending” side. But the more pernicious result was that the bank practices also flooded the market with money such that salespeople were selling payments instead of price and the accuracy of appraisals was reduced as a factor in granting loans. This created a second antitrust impact — the price of homes was driven up by cheap money rather than demand for housing. But values remained the same because median income has been flat.

The effect on consumers was that they all bought or financed homes based upon appraisals that were based upon the amount of the intended loan rather than the value of the property. So the net effect was that homeowners were forced into deals where they were taking an immediate loss of as much as 65% of the “price” of acquisition of the home or new loan. This was a hidden increase in the cost of credit. Amortizing the likely loss over the likely period of retention of the home increases the cost of credit far beyond usury prohibitions.

The overall bottom line is that the big banks acting as unregulated lenders have grabbed a market share for lending that controls more than 80% of the market and heavily influences the rest of the market.

Consumers suffer because they are not dealing with a party who could answer for damages resulting from violations of TILA and other lending and servicing statutes and because they are not left with either a lender or a loan account in real terms that is maintained as an asset on the books of any business. They are left with a toxic transaction in which they are strictly on their own when they discover the deficiencies in the lending process. They’re on their own because there is no actual creditor who claims ownership of their debt, note or mortgage.

The risk of foreclosure is high, especially on those transactions in which the appraisal is far higher than the value of the home and especially where the transaction is labeled as an option loan in which the homeowner gets reduced payments for some specified period of time. In short, the failure to regulate the securities brokerage firms acting as investment “banks” and then as licensed commercial “banks” has so distorted the marketplace that no borrower can find a source of funds who will admit to being part of the the transaction, much less the lender in any specific transaction.

Securitization of data that is mischaracterized as securitization of debt has enabled the securities firms to write off the loan concurrently with funding it, while at the same time pursuing foreclosures and other enforcement or “modification” processes in which they have been successful at pretending the loan account exists, that a party owns it, that a loss was sustained as a result of the homeowner’s “failure” to make payments on a nonexistent loan account.

Neil F Garfield, MBA, JD, 73, is a Florida licensed trial attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.

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