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Originally Posted by David Merrill
The thing most notable is that Goldskr admits there is a slight of hand going on with a third party collateralizing the homeowner's credit and he is like the Wizard saying, "Do not look behind that curtain!!" Goldskr says that since they have brought in a third party to take the risk of creating the funds off your credit, that makes it okay?
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I never implied that it was OK, I do not care for the process any more than you. The Credit River decision opened up a can of worms, which if not contained, would cause innumerable problems.
The borrower's credit had to be removed from the source of the funding. The funds are still fiat but have been created from someone else's credit. The borrower's credit now only relates to the quality of the note. The note is backed by the collateral.
The issuance of bonds is where the sleight of hand occurs. A corporation issues a million$ bond paying 15%, an investor buys that bond and puts up 100K, the rest is on margin at 6%. If all goes well, at the end of maturity the investor gets his 100K back and pockets the spread. The corporation is on the hook to the investor and the investor is on the hook to the broker/bank. The credit of both the corporation and the investor are used to create the funds. The corporations credit is used to rate the bond secured by its underlying collateral and the investors credit is used to fund the transaction. 900K is borrowed, 90% of which is fractionalized. 810K of new money is created.
Of course this is the same process that occurred previously with the wannabe homeowner, only now it happens further up the food chain.
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Originally Posted by David Merrill
Goldskr is simply a banker.
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I assume this was tongue in cheek.
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Originally Posted by David Merrill
...Goldskr admits to a slight of hand that allegedly removes your credit from the funding - but all that says is this new third party took the risk. They cannot take the home just because a third party tried to convince you that your own credit could be capitalized upon.
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The bank still retains the risk until the note is sold. The risk the third party obtains relates to their transaction with the bank only.
Contrast this process where one applies for FRN's and that of unsecured revolving credit where one applies for credit. In case of a breach, in the former the bank repossess the collateral; in the latter their only remedy is to terminate the credit. The object of the contract is different, so must be the remedy.
gldskr