Friday, August 24, 2007

How did we get from there to here...

Everyday on the news, I see the talking heads freaking out about the mortgage market. All kinds of mortgage companies are going belly up left and right.

For the hand wringing and crying, I don't hear a single voice saying:
"Why don't we go after the fuckers who thought up these bad schemes and prosecute them?" The ugly truth is that if they were to go after them, the next obvious question would be "If this was going on for so long, why didn't people try to put the brakes on and make the process more sane? The easy answer to that question is simple: $$$$$ oh yeah, and a whole bunch more $$$$$.

If you don't have a clear understanding of the whole situation, let me help enlighten you with my equally dimwitted take on things.

Step 1. Person takes out one of these variable rate loans that has a clause in it that says "After X number of months/years/whatever the interest rate is going to go up like mad!". The person taking out this mortgage is making a bet that when X comes due, that a) the worth of their property will go up to an extent that they can refinance or b) their living situation will improve so that it won't be an issue.

Step 1a. (concurrent to the other step 1) Mortgage companies package these loans into securities and sell them on the market. Other people were buy these "packages" and putting them into portfolios, 401k's, pensions, etc. The mortgage companies themselves also hold onto a large portion of these loans and use them as a revenue stream and as an asset to borrow more money for more loans.

Step 2. The housing market doesn't perform to the hopes of the person. They're suddenly stuck with a ballooning mortgage payment and can't get the loan refinanced because no bank in their right mind is going to refinance on a property that's worth less than what the person took the loan out against. They end up defaulting or becoming terribly delinquent on their loan...

Step 3. Suddenly mortgage companies have a huge problem. Firstly, they can't borrow any money for new loans because their "assets" are too risky for banks to make a bet on. Secondly, they have a major cash flow problem because their operation is funded by the loans they own. According to an article in the new york times about Countrywide Home Loans 1 in 4 of it's sub prime mortgages is delinquent. Just imagine if one day 1/4 of your paycheck was missing...

Step 3a (concurrent to step 3). All those other financial institutions who build portfolios around these "junk" mortgages are in the same pickle. Their tangle assets are in reality false promises.

So what do we do about it? Do we let these institutions flounder and get what's coming to them, or does the federal government step in and prop these companies up?

Let's be completely honest about the whole situation. The companies who profited creating and selling these loans are going to get their asses saved. Your average American who had made the unfortunate mistake of getting one of these loans is FUCKED. You can expect that the government will loan these companies plenty of money at a really great rate. However these companies will then turn around and double fuck these people. They'll let you get out of your ARM loan, but only after agreeing to terms so draconian, defaulting will actually seem like an sensible option.

However, there are a group of people who blatantly lied on their loan applications and got loans that well exceeded their ability to pay them at full APR. Those people need to be prosecuted for fraud.

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