Posted on 09/01/2007 6:43:16 PM PDT by shrinkermd
...Salomon and other institutions would take the mortgages sold by banks and stitch together bonds backed by the payments of many mortgagees, which they sold to investors...Once the mortgage originator became, in effect, a supplier to Wall Street, new, often unregulated nonbanking companies jumped into the game of brokering and also issuing mortgages. Over time, this weakened lending standards.
As Robert Rodriguez, declared in a speech in June, “The distancing of the borrower from the lender has contributed to the development of lax underwriting standards...” Meanwhile, Wall Street, sensing the appetite of investors, devised exotic ways of repackaging mortgages. Investors bought these securities in bulk, just as Goldman bought stocks.
The absence of scrutiny on Wall Street had a profound effect on mortgage origination. As mortgage bankers discovered that investors would buy virtually any loan whatsoever, they naturally lowered their standards.
And over the last few years, the Federal Reserve took short-term interest rates from 1 percent to 5 1/4 percent. This raised mortgage rates and put home buyers at risk of being priced out of the market. But bankers lent to them anyway, offering, in effect, “junk mortgages” — risky loans with low teaser rates (and much higher rates later), as well as other deviations from sound finance. Lenders and borrowers alike knew that such loans were dicey; they were counting on the borrowers to refinance — which, as long as home prices kept rising, was a cinch. Naturally, when prices stopped rising, the music stopped.
What happened over the last generation is that housing was turned from a market that responded to consumers to one largely driven by investors. Liberal mortgage financing pushed home prices higher...Rates of homeownership are scarcely any higher than in the mid-1960s.
(Excerpt) Read more at nytimes.com ...
As always, caveat emptor.
Someone finally get it correct!
Culprits? The culprits in this are the grievance-mongers who accuse lenders of redlining and denying loans to high risk borrowers. Responding to accusations of racism, the lenders made loans, bundled them up and sold them as REITs. It was a win win until — surprise — the high risk did as expected and had a high default rate.
There ain’t no free lunch.
ping
“...driven by investors..”
No - this is driven by the gamblers and speculators that call themselves stockbrokers, investment houses and financial advisors.
They gamble using huge hoards of cash, producing nothing except a warped economy, and a division of society greater than anything before it. Makes Mellon, Fisk, Gould et al look like saints.
It seems to me that the problem with mortgage backed securities is that the risk inherent in each loan in the tranche is based on the individual’s credit risk. And that is only measured at the front end in the mortgage application and underwriting process. Even if that assessment were accurate at the time, a loan with a term of 30 years might have an average effective term of say, 10 years, due to refinance, sale of home, etc. Over that 10 year average the individuals’ personal credit risk is not static, it varies with economic vicissitudes, job losses/gains, lottery winnings, etc., and I’m not sure how this s factored into an ideal system. Far from the ideal, the amount of mortgage fraud I saw in the Atlanta area in the past 5 years was staggering. Highly questionable appraisal standards led to elastic collateral valuations which, with a wink and a nod, magically came out to 102% of the necessary value. The appraiser made his fee, the originator gambled that the highly dubious information in the application was correct and that the mortgagor would not default in the first 12 months, so there was no recourse. And the investors bought a portfolio of these loans based on something other than a real time assessment of the credit risk of the borrowers represented in the pool of loans.
Another issue ignored in this piece is the proper level of government encouragement of home ownership. There may be an optimal level of home ownership. let’s say i is 68%. Any effort by the Federal government to increase it to 69% may lead to a substantial increase in foreclosures in the ensuing years. Perhaps the market for home ownership sorts itself out by risk/ability to pay and the marginal increases in home ownership represent not a virtue - but the inducement of people who shouldn’t own homes to enter the market, destined to fail, is not a great idea, no matter how much apple pie politicians can cite about owning one’s home.
Finally, someone says it the way it is....... Now if you add the oil roulette table in the scenario, the free market casino would be complete.......
They’re still missing the point.
For all this to happen you had to have a bunch of people at the bottom to whom you could sell the mortgages which in the agregate became the collateral for the bonds that the big investors and money boys could play with.
The low hanging fruit were the millions of illegals equal to the population of Ohio needing housing. Illegals and landlords for illegal dormitory houses were sucked up by slick marketeers just to get more mortage paper to feed the bond funds. Uneducated illegals couldn’t understand the fine points of teaser rates and landlords didn’t care because they planned to sell the house in a year or two when the balloon came due and the price had gone up $100,000.
The chickens came home to roost. Chalk another one up to the open borders cheap labor lobby.
And now Schumer and Bush want to give them amnesty for their mortgage payments.
Isn’t this a great country, hombre??
No, if the greedy lenders wouldn't have misplaced their professionalism, ethics and standards when lending money, we would have NEVER been in this mess to begin with.
Loan commission greed was a big factor.
Plenty of guilt to go around. Takes two to tango here.
i had an appraiser ask me “what number you looking for ?”
I told him to play it straight up.
here’s the census bureau’s take from 1965 through present.
http://www.census.gov/hhes/www/housing/hvs/historic/histt14.html
while the percent has remained relatively stable on an upward trend, the actually numbers have increased only with the increase in population.
we weathered the shake out from the savings & loan fiasco of the 80’s...we’ll do the same here.
I don’t believe this current problem (which is a small percentage of loans) takes out the real estate industry nor real estate financing.
“if the greedy lenders wouldn’t have misplaced their professionalism’
They did so under pressure to get more people into homes [compassionate conservatism] and make loans to high risk minorities [leftist race-mongering]. Without the drumbeat of criticism from Washington, the lenders wouldn’t have made many of these loans.
There ain’t no free lunch.
My tax money should not go to bail out people who bought spec houses.
Those 40,000 that have been laid off in the lending/banking and mortgage industry would probably agree.
You said “Good theory oldbill, but that is bout it. There is a large difference between commercial loans and single family home loans!”
It’s not commercial paper at the root of the problem - it’s the home loans to risky borrowers. The commercial paper is the creative construct that were based on the home loans and provided a layer or several between the underlying loan and the ultimate investors. When the base layer loans go south, the paper that uses them for its collateral becomes worthless.
Theories are not based on reality. Loans to illegals are reality. Bush and Schumer ain’t bailing out theories - they are bailing out illegals and their greedy anglo landlords and the homes they bought that they couldnt’t afford.
Nice try. You qualify for a position at the Wall Street Journal.
“Rates of homeownership are scarcely any higher than in the mid-1960s.”
I believe this to be inaccurate.
While it’s true, the sub-prime loan was a riskier loan, the risk was priced into the rate. The higher the risk, the higher the rate.
In addition, the Fed raising rates 17 straight times does have ramifications.
True enough. But where were the rating agencies, and the sophisticated buyers at the consuming financial institutions, on this? Asleep at at the switch, as far as I can tell. It's the fact that such paper was salable in a secondary market, at something other than an appropriately deep discount, that allowed the game to continue as long as it did.
Rating agencies? Probably the same ones who were sleeping at the switch in the S&L fiasco in the 80’s.
When big bucks are being made nobody is watching out for you. Think Enron, Tyco, the dot.com mess, the illegal alien invasion.
“Oversight? Oversight?? We don’t need no steenking oversight!”
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