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The whole situation is a sad one because this really isn’t a black-and-white problem.
(1) The government put pressure on banks to lend to uncredit-worthy individuals, and to make deals for people who couldn’t come up with the traditional downpayments.

(2) This, in turn, meant banks were holding many risky assets. In order to keep liquid, the banks had to sell the mortgages up the line. The uncredit-worthy mortgages wouldn’t have a market in themselves but, combined into pools with good mortgages, the buyers were gambling they could cover the losses. Where they couldn’t, they had insurance to help.

(3) Rather than sell individual mortgages, the parties further up the line sold “stock” in pools of mortgages (i.e., they securitized the pool of mortgages), of which they had no real idea, thanks to Congress apparently, which proportion were owed by creditworthy debtors and which percentage would almost certainly default. Because the investors could not in any way judge the soundness of the fund, again insurance was involved.

(4) Flush with cash from the securitization, and encouraged by ballooning home prices, the mortgage industry went into overdrive to find home buyers. The result was aggressive marketing by so-called mortgage professionals who turned out not to be so professional.

(5) Potential buyers and current homeowners, lured by the market, gambled their homes would continue to increase in value to the ether so they entered unrealistic mortgage agreements or drained the equity of their homes as quickly as they could.

(6) Congress, not wanting to face the music of their own complicity, continues to point the finger everywhere but at themselves and continue to promise homeowners they can stay in homes they realistically can’t afford. This means postponing the inevitable and keeping the market artifically high so more homebuyers are priced out of the market.

So no one has clean hands here. Everyone was caught up in the boom of home prices and got greedy: the banks wanted more mortgage deals and to get rid of risky ones; Congress wanted the votes that come from social largesse; traders wanted another exciting financial product to market; investors wanted in on the housing boom; homebuyers wanted homes they really couldn’t afford.

But housing has always been a gamble and gamblers sometimes lose. It was unrealistic for anyone to believe the market had only one direction to go. It is time for many homebuyers to cut their losses and go for more affordable housing. This will bring down the prices and bring more in line with economic reality. To the extent there was real fraud, that should be handled on a case-by-case basis. But the securitization of mortgages wasn’t the villain here and attempting to void valid contracts based on failure to record a securitization isn’t the answer.

By the way, if you attack securitization, you should know you will constrict the funds available for mortgages and the price of mortgages will go up, even if the housing prices go down.

I feel badly for many caught up in this situation. Some have been hurt by the economic downturn and are losing their homes. There are others who simply got greedy and behaved unrealistically by buying too much or tapping their equity. A backyard neighbor of mine bought his home in 1996 for $190k, a great deal at the time. In the next few years they refinanced the house five times, each time upping the principal based on inflated home prices. The last mortgage was for $565k, without any appreciable increase in the value of the home. The money went to boat, trailer, cars, vacations. They lost the home about a year ago. The home is still worth more than the original $190k but they had become greedy and gambled on the housing market. Yes, there were plenty of parties enticing them to do so but in the end it was their own decision to take the risk. I have a hard time feeling sorry for those people.

It may seem harsh but it is probably better to let the economy take its toll and let these people move on with their lives than try to maintain some artificial finger in the dike only to see the flood drown them later. The country is strong but it can take only so much of a system which privatizes gains and socializes losses. It has to be private gain and private loss, or public gain and public loss to be fair (and that public part isn’t sustainable at all).