Jerky Jargon & the Secret Meanings

DISCLAIMER: I am not a financial expert and I have never played one on TV. The definitions below are MY way of defining terms in a more user-friendly way than any banker will explain them. Some are fairly accurate, some are kinda sorta correct, and others may be a reflection of my utter cluelessness about financial jargon. Please feel free to post a comment about any of these definitions if you think it will clarify the term or just plain annoy the jerks in the banking industry.

In alphabetical order, but not necessarily in order of importance.

Credit Default Swap (CDS) – Okay, the name of this ridiculously complicated financial instrument should give you a clue about how shaky it is. Whenever someone talks about making a “Swap,” it reminds me of those days on the school playground, when the bully would approach and say, “Hey, I’ll swap you my Irving LaToussa baseball card for your Babe Ruth rookie card.” Anytime someone uses the word swap, you can pretty much assume someone’s going to get screwed. So you ask the bully, “Why should I want your Irving LaToussa card? And who the heck is Irving LaToussa?”

“Irving is my second cousin’s big brother…he’s playing Triple A ball right now, but as soon as his broken knee gets better, he’ll be playing for the Cubs and his card will be worth a lot, I guarantee it,” the bully says. “So swap me for it, you little punk!”

Bullies are buying credit default swaps and potentially walking away with a lot of money for doing nothing.

Then there’s the Naked Credit Default Swap – This is like having the bully swap you the Babe Ruth rookie card for the Irving LaToussa card, but he doesn’t actually own the LaToussa card. In other words, he has no skin in the game, and if the Babe Ruth card suddenly becomes worthless, it doesn’t matter to the bully. He just walks away. Naked. Ewww, the mental image of that should be enough to keep you away from Naked Credit Default Swaps.

Excessive Forbearance – When a lending institution is considering giving you a loan modification, one option they have is to “forbear”some of the principal you owe on the loan. This doesn’t mean they’re reducing the amount of principal you owe, which is known as Principal Reduction. It doesn’t mean they’re losing money. It means that they will set aside a portion of the loan amount and not charge interest on it for a certain length of time, so that your loan payment is smaller. They are not required by law to “forbear,” or defer, more than 30 percent of the loan. Of course, the way the banks determine what is "excessive" is a very sneaky, slippery, duplicitous formula that is rumored to have been written by Machiavelli in 1507. AND, they frequently use incorrect data to make the determination.

Executive Response Unit - Most loan service providers have this department, although it may go by different names at different banks. This department is also known as, "Put oil on the squeaky wheel" department. If you complain enough about the way you're being treated - AND you file a complaint with the Consumer Financial Protection Bureau (see Contacts to Use and Abuse), you may get bumped up to this department.

The purpose of the Executive Response Unit is to make you feel important, and that your loan modification is being handled quickly and efficiently. That's just window dressing. They will act as slowly as everyone else.

Freddie Mac - A taxpayer-owned mortgage company, which is supposed to make homeownership easier. One thing that makes owning a home more affordable is getting a cheaper mortgage. On its website Freddie Mac says it has: "A public mission to stabilize the nation's residential mortgage markets and expand opportunities for homeownership."

Now, here's the truth about Freddie Mac. Read these stories and decide for yourself whose side they're on.

Freddie Mac Betting Against Struggling Homeowners

Treasury Investigates Freddie Mac Investment

Foreclosure – The state of anxiety that Freddie Mac and Fannie Mae hope will turn you into a quivering blob of gelatinous defeat so you will quit pestering them for a loan mod while they’re busy making money for their executives.

Government-Sponsored Enterprise or GSE – A government-Sponsored Enterprise (GSE) is a  financial services corporation corporation created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy, such as home finance. Freddie Mac and Fannie Mae are both GSE’s.

GSE securities carry no explicit government guarantee of creditworthiness, but buyers and lenders both believe there is an "implicit guarantee" that the government would not allow such important institutions to fail or default on debt. This perception has allowed Fannie Mae and Freddie Mac to save an estimated $2 billion per year in borrowing costs.

Now, you do the math: Fannie and Freddie save about $2 billion a year because they have government backing AND taxpayer funding so they get favorable interest rates on the money they borrow… but they won’t give loan modifications to people who are simply asking to have their interest rate reduced and their loan extended.

HAMP - This stands for Home Affordable Modification Program. This is what you want and probably won't get. After about six months of trying to get this loan modification, you will start to think HAMP stands for How Arrogant Mortgagers Procrastinate.

HARP - This stands for Home Affordable Refinance Program. Since you didn't qualify for HAMP because you weren't in Imminent Default (see definition below), this is your second option. But since you are looking for a loan modification because you can no longer afford your mortgage, you won't qualify for this because you don't have enough income. Hence, HARP really stands for the message the bank is giving you: Hey Asshole, Retire Poor.

IMMINENT DEFAULT - You need to prove that your are in danger of imminently defaulting on your loan in order to qualify for a HAMP loan. The problem is, almost no one at the bank will tell you what it means to be in imminent default. After sleuthing through CitiMortage's contact list, I finally got a naive new agent on the phone who spilled the beans to me. If the call was monitored for quality assurance, she probably got fired as soon as we hung up. To qualify for imminent default, you need one of the Three Big D's.

• Death: If you experience a death in the family, particularly someone who shares the responsibility for paying your mortgage, you might meet the imminent default criteria. If you personally experience death, it will improve your chances, but at that point, you probably won't care.
• Disablement: If you or someone responsible for paying your mortgage becomes disabled, this could be your golden ticket to pass the imminent default requirement. If the disability involves dismemberment, that's even better. Banks like it especially well if the dismemberment involves arms and legs, one eye and the frontal lobe.
• Divorce: If you have divorced your spouse and you are now the only one responsible for the mortgage, this could do the trick. But you must be able to prove that you got cleaned out in the divorce, leaving you with nothing but the house, two dogs and three cats. It would be helpful if one of the pets is disabled, dismembered or dead, but only if it's one of the dogs. Bankers don't like cats and they will take no pity on a person with a disabled, dismembered, dead cat.

My first agent at CitiMortgage told me none of this. He let me sashay down the primrose path, thinking I would possibly meet the imminent default criteria because I was out of extra money, savings and things to sell on ebay, and therefore, to my way of thinking, in imminent default. Oh, how gullible I was back then. My agent Ramon must have been sitting in his cubicle somewhere, eating Snickers bars and laughing hysterically at the thought of me contemplating  a successful loan modification.

After getting turned down the first time, I bemoaned my bad luck as a person who was healthy, single and alive. Then a naive agent told me there is one other way to qualify for imminent default - If you are more than 61 days behind in your mortgage payments, you automatically qualify for imminent default.

And therein lies the loophole. Stop paying your mortgage for 61 days and you will be in imminent default. Actually, you’ll probably be in actual default, not imminent default, since the bank will be eager to start foreclosure proceedings before you’ve even gotten a chance to reapply for a loan modification. It’s all in the timing. At some point you will slip through the loophole of imminent default and into the noose of foreclosure.

Mortgage-Backed Securities or MBS – Well, at least they got the “BS” part of this right. It is total BS. (It helps if you read the definition of Subprime Borrowers before continuing) Example: Joe and Svenlanda’s subprime loan was lumped together with a bunch of other loans to create a Mortgage-Backed Security. But since Joe and Svenlanda aren’t paying a nickel on their loan, the MBS is fairly worthless.

Net Present Value - Ready? This is how you calculate your Net Present Value:

Get it? Sure you did. Just like you got advanced calculus while you were still in utero. The NPV formula might as well be a secret Chinese equation for nuclear fusion covered with peanut butter. A blog about NPV and how it is being abused by lenders is forthcoming. Hopefully that will shed some light on the gray matter.

PITIAS – (pronounced Pity Us, which rhymes with Hideous) This is a term underwriters use to determine the total monthly cost of your loan: The combined monthly dollar cost of Principal, Interest, Property Taxes, Insurance, and Association dues. Freddie Mac is notorious for OVER-estimating your PITIAS and UNDER-estimating your gross monthly income and NPV (Net Present Value, which rhymes with “Get Over It, We Will Fudge The Numbers So You Won’t Qualify For A Loan Mod”).

Principal Reduction Alternative (PRA) - Also known as Principal Forgiveness, this is a tool Freddie Mac and Fannie Mae can use to reduce the size of a homeowner's monthly payment. They give up, or "forgive," a portion of the loan principal. In spite of the fact that study after study shows that PRA will BENEFIT the taxpayers, help homeowners in financial distress avoid foreclosure and substantially improve the housing crisis situation, acting director of the Federal Housing Finance Authority Ed DeMarco REFUSES to implement this practice. Off with his head!

Subprime Borrowers – You probably know this one, but just in case, I’ll give you an example: A teacher earned $60,000 a year, then married a Swedish masseuse hottie who earned… well, she earned a lot when she was a working girl, but after she married her meal ticket, she quit working and earned nothing. They took out a subprime loan for $900,000 to buy a house in California. No questions asked by the loan company, no money down.

When the economy tanked, these people applied for a loan modification. They didn’t get it, so they sued their loan service provider. When a homeowner sues their loan service provider, the bank isn’t allowed to foreclose on them. So Joe and Svenlanda are living in a fancy home they can’t afford, making no mortgage payments while their lawsuit drags on and on. They will lose, of course, but it’s been three years and they’re living large, so they don’t care. Because of their incredible recklessness and irresponsibility, many mortgages are almost worthless. Which brings us to the term, Mortgage-backed securities or MBS (above)