Multiply this by HOW MANY mortgages out there?

November 16, 2010 1:21 PM

Dan Ekstrom is a guy who is in the right place at the right time. His profession? He performs securitization audits (Reverse Engineering and Failure Analysis) for a company called DTC-Systems. The typical audit includes numerous diagrams... The following flow chart reverse engineers the mortgage on the Ekstrom family residence. It took Dan over one year to take it this far and it clearly demonstrates what happens when there are too many lawyers being manufactured.
posted by Pirate-Bartender-Zombie-Monkey (45 comments total)

Personal favorite part of the financial diagram? Far right. It reads "BLACK HOLE", with several arrows pointing towards it.
posted by Pirate-Bartender-Zombie-Monkey at 1:24 PM on November 16, 2010 [3 favorites]

Uh... what was that middle part again?
posted by Naberius at 1:24 PM on November 16, 2010 [1 favorite]

It looks terribly complicated, but so would the process by which I just authored a custom DVD with nested menus. Doesn't matter to the people playing the disc; the complexity is handled below the surface and they don't need to know anything about it.

Is there a point I should understand about the mortgage system from this? It kinda seems like explanation for the sake of obfuscation. Lots of things are complex under the hood, but that in itself doesn't make them bad.

Although I guess the 'black hole' is worrying.
posted by echo target at 1:30 PM on November 16, 2010 [4 favorites]

Remember to hear Barney Frank's voice in your head while you read the article.
posted by ZenMasterThis at 1:31 PM on November 16, 2010 [3 favorites]

Any sufficiently advanced financial instrument is indistinguishable from fraud.
posted by xthlc at 1:31 PM on November 16, 2010 [144 favorites]

"...there are too many lawyers being manufactured."

Er, how exactly does one manufacture a lawyer? Is this like the opposite of the stripper factory in Flying Spaghetti Monster heaven?
posted by mullingitover at 1:32 PM on November 16, 2010

It looks terribly complicated, but so would the process by which I just authored a custom DVD with nested menus.

There is zero chance of anyone being thrown out of your custom DVD with nested menus.
posted by nomadicink at 1:34 PM on November 16, 2010 [9 favorites]

There is zero chance of anyone being thrown out of your custom DVD with nested menus.

The stakes are much lower, it's true. Just trying to think of a personally relevant anecdote. Let's try something else: bridge design is fantastically complicated. Should we give it up?
posted by echo target at 1:36 PM on November 16, 2010 [3 favorites]

Is there a point I should understand about the mortgage system from this? It kinda seems like explanation for the sake of obfuscation. Lots of things are complex under the hood, but that in itself doesn't make them bad.

Yes, this. The problem isn't complexity. The problem is unethical or outright illegal behavior by various parties. The CMBS process works fine when cheating someone or presenting fraudulent documents results in real penalties. As with a lot of outrage-filter, it's a long-form appeal to ignorance.
posted by Inspector.Gadget at 1:40 PM on November 16, 2010 [4 favorites]

The stakes are much lower, it's true. Just trying to think of a personally relevant anecdote. Let's try something else: bridge design is fantastically complicated. Should we give it up?

Yes. Absolutely.

If you're designing bridges rated AAA, bestest, safest bridge out there, certified by the bridge cert people, and it turns out the bridge design is shit, collapses routinely, people are getting killed, the bridge cert people falsified the certification, and both you and the cert people made a pile of money?

Yes, you in particular should go sell shoes after you do your prison term, and design no more bridges.
posted by Pirate-Bartender-Zombie-Monkey at 1:41 PM on November 16, 2010 [38 favorites]

I think he needs to make an animated gif out of the chart, with little dollar signs flowing along to the tune of Looney Tunes' Powerhouse
posted by Esteemed Offendi at 1:43 PM on November 16, 2010 [5 favorites]

Mortgages have been around a long time and didn't necessarily need fixing. I'm not sure if the process represented by this diagram is useful progress.
posted by redyaky at 1:43 PM on November 16, 2010

the complexity is handled below the surface and they don't need to know anything about it.... Is there a point I should understand about the mortgage system from this?

The difference between your DVD player and your mortgage is that, given the stakes of your mortgage, you should be ale to understand it so that you can make an informed decision about your risks and obligations.

For something like bridge-building, we go to great lengths to certify professional engineers who have clear liability--we delegate the requirement to understand how the bridge works. What we don't do is ignore the requirement that somebody neutral or liable (in a practical sense) understand it.
posted by fatbird at 1:50 PM on November 16, 2010 [2 favorites]

echo target: It looks terribly complicated, but so would the process by which I just authored a custom DVD with nested menus.

When you create a custom DVD menu, you don't have a bunch of third parties coming in to "handle" the various tasks that are required, each taking a nice fee along the way.

I had a real "so this is how money really gets made" moment when we closed on our first place. Granted, this is in NYC where a lawyer is required to handle the transaction, but in the room to handle the transaction of a sale that didn't even involve a broker were:

- Our lawyer
- His lawyer
- Our mortgage bank's lawyer
- His prior mortgage bank's lawyer

This was a completely routine sale. I think the lawyers must have done a combined total of 30 minutes work on our case, but there they were, clocking in their fees.
posted by mkultra at 1:54 PM on November 16, 2010 [2 favorites]

the bridge cert people falsified the certification

See, that there is a failure not of process but of implementation. That shows you should get the crooks out of the bridge business, something I think we can agree ought to be done with regard to mortgages.

Really, I'm just wondering if this diagram is actually trying to explain anything or just make me instinctively want to burn it. An appeal to ignorance, like Inspector.Gadget says.
posted by echo target at 1:54 PM on November 16, 2010

This was a completely routine sale. I think the lawyers must have done a combined total of 30 minutes work on our case, but there they were, clocking in their fees.

...and producing malpractice liability in case they screwed up. One nice thing about lawyers being involved is that it gives you someone to seek compensation from if they screw up. And people do, to the tune of billions of dollars every year in the US (a sad commentary on the state of the profession, I might add).
posted by jedicus at 1:57 PM on November 16, 2010

To continue with the DVD analogy, this is like what it would be if the movie was divided up by chapters and distributed, along with various extras, across 20 or so disks. You'd still have the entire movie, but have fun trying to watch it.

Now lets say, for you to watch a movie, each disk must be obtained from a different party, who keeps them with disks containing bits of other movies. Oops, one got lost in the mail...
posted by TheWhiteSkull at 1:58 PM on November 16, 2010 [1 favorite]

Er, how exactly does one manufacture a lawyer? Is this like the opposite of the stripper factory in Flying Spaghetti Monster heaven?

In Flying Spaghetti Monster Hell, the beer is flat and the strippers have VD. Therefore, no it is not the opposite. I think the version of hell we're looking at would be a combination of the Bureaucracy from Futurama mixed with LSD, a touch of Cthulu and the successful prayers of a Skull and Bones society.

Blessed be he, the Flying Spaghetti Monster, and may he touch me with His Noodly Appendage. Ramen.
posted by Mister Fabulous at 2:01 PM on November 16, 2010 [6 favorites]

The use of giant dashed lines as the borders for the boxes on the diagram goes a long way in making the whole thing look incomprehensible.

This is from the same site that had the Lets All Destroy Chase Bank by Buying Silver thing that got deleted earlier today. There is something a bit off about the place.

I don't know what they're on about and really don't care enough to try to sort it out but they give off a weird agenda laden vibe.

Note that none of the above means that I'm in favor of incomprehensible financial arrangements or against this post.
posted by Babblesort at 2:02 PM on November 16, 2010

To continue with the DVD analogy, this is like what it would be if the movie was divided up by chapters and distributed, along with various extras, across 20 or so disks. You'd still have the entire movie, but have fun trying to watch it.

Now lets say, for you to watch a movie, each disk must be obtained from a different party, who keeps them with disks containing bits of other movies. Oops, one got lost in the mail...

Continued DVD analogy. All of the DVDs are also in different Region Codes, including Region 5, aka Black Hole.
posted by Mister Fabulous at 2:02 PM on November 16, 2010 [1 favorite]

Things like this make me sad.

I like to think that I'm not an entirely stupid person, at least not most of the time. But I look at this, and it's all just gibberish to me. Now, there are a lot of things in life that I could make this statement about, but the thing about this particular one that fills me with sorrow, is that I'm very nearly certain that there could be an enormous fraud, sitting right in the middle of this, sucking up someone's money, and I'd have no idea at all.

And that someone could be me. There is so much complexity that even spelled out, I just don't understand it.
posted by quin at 2:25 PM on November 16, 2010 [1 favorite]

echo target: It looks terribly complicated, but so would the process by which I just authored a custom DVD with nested menus.

But the number of fallible, corruptible, and otherwise unreliable human beings directly involved with your DVD authoring process is just one: you.

We (humans) use computers to help us with hideously complicated tasks because the computers are so very, very much more consistent and predictable than we are.

I look at this chart with the understanding that many of the boxes are human organizations, not computer programs. Often large, complicated human organizations.

Then I think about what happened last time I asked a human being for half-and-half toppings on a pizza.
posted by Western Infidels at 2:25 PM on November 16, 2010 [7 favorites]

Is the point of this to explain "where" my mortgage is, when it has been "securitized" and sliced up into many little pieces, each allotted to and sold in a package with little pieces of others mortgages, where that package may again be sliced up and packaged and resold, ad infinitum?

If so, my most esteemed thanks to this gentleman. For the two or so years that I've been reading about all of this, the one thing that's really been missing is an accessible case study of just how this process works. Maybe accessible is expecting too much.
posted by hwestiii at 2:47 PM on November 16, 2010

Obligatory This American Life-related comment: Their "Toxie" show a couple of weeks ago did an admirable job of conveying the complexity of securitizing mortgages, while being something that a sane, non-lawyer person would want to peruse.
posted by Halloween Jack at 2:48 PM on November 16, 2010 [1 favorite]

If you're designing bridges rated AAA, bestest, safest bridge out there, certified by the bridge cert people, and it turns out the bridge design is shit, collapses routinely, people are getting killed, the bridge cert people falsified the certification, and both you and the cert people made a pile of money?

But that's not all, not only did practically all the bridges you designed collapse, but somehow their collapse caused the entire transportation system to come to a halt *and* cause bridges previously though to be safe to collapse. And you and your friends made a pile of money and then the government paid you even more money lest the roads, culverts, sidewalks and pedestrian overpasses you designed also collapse.

would you buy shoes from these people, how would that work out?
posted by ennui.bz at 2:53 PM on November 16, 2010

This is a derail, but I've eschewed flowcharts for programming for years, but the idea of a blackhole element just gives me the documentation twinge. Sharepoint repositories are a very good candidate.
posted by sammyo at 3:11 PM on November 16, 2010 [3 favorites]

it clearly demonstrates what happens when there are too many lawyers being manufactured.

Umm... more like business school graduates. Seriously, graduates of Harvard B-School were very highly placed at almost every one of the big firms that went down.
posted by valkyryn at 3:23 PM on November 16, 2010 [4 favorites]

Follow the money, people! It's not so complicated.

Actually it is. Please also tell me how to follow the money in the diagram.
posted by vidur at 3:32 PM on November 16, 2010 [1 favorite]

Oh hell...zerohedge making its way here...I've been tempted a few times this week to repost here.

And yeah, follow the fucking money...i think there are very wealthy people in this country that took that as a challenge to make tracing fin fraud as so ungodly complicated that the type of GOP sloganeering would make real systematic fraud hard to detect
posted by lslelel at 4:27 PM on November 16, 2010

One thing that strikes me about this diagram is that it's deliberately complex, when it doesn't necessarily need to be. It's diagramming by agenda, instead of diagramming to explain.
posted by Malor at 4:41 PM on November 16, 2010 [4 favorites]

The typical audit includes numerous diagrams including the following:

Transaction Parties and Flow (similar to the chart below, but much easier to understand)

I think the whole point is that this is far more complicated than the usual mortgage. Like cut off the bottom half and it'd be closer to normal.
posted by Monday at 4:41 PM on November 16, 2010 [1 favorite]

Before mortgages where sold as commodities to be traded the chart would have been a lot simpler.

It took this guy a YEAR to figure out where the money was going and probably more importantly WHO HAD POSSESSION of the title.

Before our deregulation frenzy a home purchaser generally KNEW who had the title, the bank he applied for the loan to buy the house. The bank held the title, the home buyer paid off the mortgage, when s/he was done, they got a the title.
posted by Max Power at 4:47 PM on November 16, 2010 [1 favorite]

You don't need to understand the process to know it's fraudulent. Just look at how much you spend versus the value you receive. A 30-year mortgage paid at the prescribed intervals can end up costing as much or more than the house it is used to purchase. Simply can't be that the loan is as valuable as the house, can it?
posted by fartknocker at 4:48 PM on November 16, 2010

would you buy shoes from these people, how would that work out?

Blew out my flip-flop
It was a pop-top
posted by one more dead town's last parade at 4:49 PM on November 16, 2010

Yep, that there is how a whole lot of people get royally ripped off and a few folks make craptons of money. Notice if you follow the cash flow (green lines) it splits in a box full of "Trustees" and "Servicers," and the like, then winds up dead-ending in a box of "Investors" with a bit split off to Standard & Poor's.

Somewhere in the box where the money splits that you'll find the hidden "Cash Black Hole," where the *real* money disappeared and the *imaginary* money went on to be counted as real money in the market.

The other Black Hole on the chart is where the documentation disappeared.
posted by zoogleplex at 6:02 PM on November 16, 2010

This confirms a theory I had once been told by a finance guy.

"You want to stand near where the money passes."
"Why?"
"Because some of it sticks to you."
"Sticks to you?"
"Yes. That's why you need to find out where the money is getting passed along and put yourself into the path of it somehow. Then, the more money passing by, the more of it sticks to you."

I assume by 'sticks to you' he really means fees are charged. But it certainly explains why there are so many organizations that have managed to situate themselves into the path of the money. And the investor at the end wonders why he's getting so little money.
posted by eye of newt at 7:49 PM on November 16, 2010 [6 favorites]

eye of newt, my dad once told me if I ever wanted to be rich, I needed to put myself in a position where I was a "skimm-ER" as opposed to a "skimm-EE."

What you said is exactly what he was talking about, and what this chart demonstrates.
posted by zoogleplex at 8:43 PM on November 16, 2010

A 30-year mortgage paid at the prescribed intervals can end up costing as much or more than the house it is used to purchase. Simply can't be that the loan is as valuable as the house, can it?

Yes it can. At 5%, a 30 year mortgage on $165,000 will result in $153,872.04 in interest payments. There is absolutely nothing fraudulent about this, it's simply the cost of having someone loan you a large amount of money for a long time. You misunderstand the time value of money.

Say you want to buy a house. Odds are pretty decent that you don't have enough cash just lying around to buy it outright. What to do? Borrow! Well, here's the thing. Why should the bank loan you any money? I mean, banks aren't charities. They're in banking to make a profit. The bank has managed to accumulate sufficient capital to provide you with the money to buy a house, something you couldn't do on your own. Essentially, you are "renting" the money, just like renting a car. The only difference is that you're "renting" the bank's money for longer than you'd rent a car, and you aren't giving it all back at once. But renting money is precisely what a mortgage is, and there's nothing fraudulent about that.

Compound interest is a bitch.
posted by valkyryn at 3:44 AM on November 17, 2010 [4 favorites]

I think this is sort of an anti-chart, something designed to make a moderately complicated process look really confusing. For one thing, there's no time element. Arranging things by when the transactions occurred would go along way to making it more comprehensible. They should be called confuseograms or something. Like that HCR chart the republicans were running around with during the debate.

...and producing malpractice liability in case they screwed up. One nice thing about lawyers being involved is that it gives you someone to seek compensation from if they screw up.

Which requires hiring another lawyer. A lot of this routine stuff could be easily handled by computers, with machine-readable contracts and laws. Of course, that's a somewhat self-interested position: I want to replace legal jobs with programming jobs :P. But still, it would make things much easier.
posted by delmoi at 6:11 AM on November 17, 2010

Er, how exactly does one manufacture a lawyer?

I am given to understand it involves squatting, with the occasional grunt. Afterwards a hideous stench is often noted.
posted by tommasz at 6:13 AM on November 17, 2010 [1 favorite]

Of course, that's a somewhat self-interested position: I want to replace legal jobs with programming jobs :P. But still, it would make things much easier.

As a lawyer who does a lot of corporate compliance, including the administration of legal transactions online, I'd beg to differ. There are a ton of things I would really like my company to do electronically which it doesn't,* largely because getting that thing programmed would take a huge investment of time and money given the way we do things.** I've got the legal side completely ready to go, but nooooo, anything that requires programming hours is verboten. Instead, they pay sixteen grandmas to shuffle papers indefinitely, as they're cheaper than programmers. Doesn't cause me any extra work, it's just aesthetically offensive and economically brain-dead.

Lawyers may be more expensive than programmers, but entry-level paper-pushers are cheaper than either. Which actually the problem here: either a lawyer or a programmer would take one look at this thing and go, "You want to do what now?" That's because both lawyers and programmers actually know how to do things and work with complicated, abstract systems. Instead of them, what we've got are b-school bureaucrats, marketing types, and glorified secretaries. None of whom I would trust with a Cuisinart, let alone the entire structure of the real estate market.

*Like, say, accept credit card payments. You'd think that a quarter-billion-dollar company with business in forty states would do that. You'd be wrong.

**In all fairness, the idea that our programmers are completely incompetent has occurred to me. If I could convince the Powers That Be to hire my buddy's company to set them up with a modern database, I could completely revamp the system, which is almost as old as I am, for about $1 million in six months. Instead, we've spent $5 million and ten years writing a GUI. I hate my job.
posted by valkyryn at 7:21 AM on November 17, 2010

The "Toxie" episode of TAL was really entertaining and informative. Unfortunately it's no longer available for free download but you can find out more about Toxie from "her" page on Planet Money. It died in September.
posted by Deathalicious at 8:49 AM on November 17, 2010 [1 favorite]

Compound interest is a bitch.

Your explanation seems thorough enough, but it doesn't make my butt hurt any less. All I see is a system that puts the greatest burden on the components least capable of carrying it, and the least stress on those with the greatest wherewithal. To my relatively uneducated ears, that sounds backwards.
posted by fartknocker at 11:24 AM on November 18, 2010

Interesting to compare that chart with what the process must have been to get a mortgage note in 1942.
posted by McGuillicuddy at 4:34 AM on November 22, 2010 [1 favorite]

All I see is a system that puts the greatest burden on the components least capable of carrying it, and the least stress on those with the greatest wherewithal. To my relatively uneducated ears, that sounds backwards.

There's a reason most major world religions have considered the charging of interest to be morally problematic.
posted by valkyryn at 10:21 AM on November 22, 2010 [1 favorite]