Monday, September 3, 2007

Mortgage Crisis From the Trenches

Is anybody surprised there is a mortgage "crisis"?

As I understand it, a high percentage of mortgages in the "sub-prime" market are in default. This would be bad enough, but the problem is compounded by these mortgages having been grouped together into some kind of investment instrument, which a lot of banks, brokerage houses and financial institutions have invested in. I guess they did this because the securities offered a "good return" at a "low risk". After all, they were secured by real estate. When a much higher than expected percentage of these loans went into default, the value of the investment instruments backed by these mortgages went down, and a lot of big players lost their money. THAT is the crisis we keep reading about. I realize the way I just explained it is an over-simplification, but when we talk about the government coming in and helping with this crisis, let's be honest about what really happened.

Here are a few facts from the trenches, from personal observation:

1. If someone puts virtually no money into a real estate purchase, and two banks financed the 100% of the purchase, and the purchaser either lived there without paying for a year, OR walked away from the property when the value went down, is that person a "victim"? Are the banks who put up the money, made their fees, and then sold the loan into the market...."victims"? Are the investors who bought these mortgages, foolishly relying on the real estate market to continue soaring...."victims"?

What I have seen are insane prices, with 100% financing obtained by mortgage brokers who would do ANYTHING to get the loans approved. If you took this transaction to 1000 intelligent financial people and said "give me odds on the ultimate success of this transaction", with success being defined as the borrower does not end up in default, 90% of objective observers would say the odds of success are 10% or less. Yet I saw many transactions like this sail through, as if this were normal business, and I know, there were THOUSANDS of transactions just like this. And yet, big players invested in this.

If you are not familiar with some of the fine points of a "sub-prime" transaction, fasten your seatbelts, you are not gonna believe this....

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