The Real Reasons for the Mortgage Collapse
Mortgage Brokers and Consumers Have Been Wrongfully Scapegoated
Mar 12, 2009
A lot of finger pointing toward mortgage brokers and mortgage lender loan officers was printed and broadcast after the sub-prime mortgage collapse. There's nothing unusual about the big guys at the top offering small fry at the bottom as scapegoats. The media eats it up. Easy fast scoops. Culprits caught and condemned; case closed.
It takes more effort and research to pry into the real source of our mortgage problems. One has to manage through the smoke screen of unfamiliar financial terms and obfuscation of the Wall Street manipulators. Then one has to look toward the secondary mortgage market as the source of our mortgage collapse.
The Mortgage Secondary Market
The secondary mortgage market institutions create the loan guidelines, not banks or mortgage lenders. These guidelines are meant to screen and qualify loan applicants according to different mortgage programs. Two well known examples of secondary market institutions are FANNIE MAE and FREDDIE MAC. There are others less well known who comprise large segments of the financial arena called Wall Street.
These groups buy the paper, or notes, that document each home owner's loan from several banks and mortgage lenders. The loan promissory note is considered a commodity of value. Each lender has agreements with different segments of the secondary market to be able to sell them notes, usually within one month of issuing the loan. When the bank or mortgage sells the note to a secondary market institution, that group winds up collecting most of the interest on the loan as time goes on.
Upon that sale, the lender receives a one-time payment for the sale, while usually retaining the servicing rights. Servicing means collecting the monthly payments for the owners of the notes in the secondary market. It is similar to a real estate management company finding renters and collecting the rent on behalf of the property owners. Servicing mortgages pays. But, long term, the biggest beneficiary is the owner of the note.
Then the Financial Machinations Begin
The secondary market institutions then figured out how to make more from the notes they own. They package or bundle them and sell them internationally. Usually Fannie and Freddie bundle them as bonds. These bonds or other financial instruments are purchased in large bulks with the intention of profiting from their yields. China has a lot of these bonds.
The American government is considering granting China eminent domain rights with these bonds. This is an effort to keep China in the market and the economy here afloat. But if our economy worsens, China may have the right to claim properties (eminent domain) here in the USA.
Self Destructing with Derivatives
Even worse was the trend toward creating derivatives with the secondary mortgage market's assets. Derivatives have no intrinsic value. They are financial instruments created for trade and speculation based on actual instruments of value.
Here's what Warren Buffet, one of the world's most successful investors, said about derivatives in his Berkshire Hathaway 2002 Report. “We view them as time bombs, both for the parties that deal with them and the economic system . . . as weapons of mass destruction”. Linda Davies, in her novel Into the Fire, described derivative traders as “bookies once removed, taking bets on bookies taking bets”.
The wild speculation with mortgage derivatives led to a financial bubble that could not be sustained. This greedy pursuit caused severe financial collapses of several Wall Street institutions. Those "weapons of mass destruction" imploded. So who is to blame? Not borrowers, loan officers, and mortgage brokers, but those Wall Street gamblers who have been getting bailed out by the government with your tax money!
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