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The mortgage maze
Take a look at this interesting article about the complexity of the new mortgage securities market from the consumer's perspective. While pooled ownership and risk spreading enabled strong growth in the sector for a long time, as well as increased access to credit, they also have had the effect of increasing the complexity of the market and, in many instances, of shifting what have traditionally been mortgagee obligations onto imperiled homeowners.
And remember: all of the difficulties to which this article refers exist before one factors in complicated, sometimes dangerous mortgage instruments.
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Honestly, I don't see what on Earth these securities have to do with the mortgage market discussion. (I know that many home loans were made by banks that knew these loans could be sold to speculators.) However, dwelling on these securities is just a smoke screen to cover the fact that no one--neither Democrats nor Republicans--were willing to speak up and take a chance on busting the housing-price bubble over the last few years.
My wife and I sat down with a few banks regarding potential home loans. And, we walked away simply astounded at the amounts of money they were willing to throw at us. They were willing to let us borrow ourselves straight into the poorhouse, which any non-idiot could easy understand. It had nothing to do with the securities market. Never came up in the discussion. That's only a concern after 1) you've taken the outrageous loan, 2) the bank has sold it downstream, and 3) you're looking at bankruptcy.
So, let's stick to the real issues here. Banks were making crazy loans without proof of income. Speculators were buying these loans with full knowledge of the lack of due diligence on the part of the banks. Homebuyers were having a field day making suckers out of each other.
August 7, 2007 2:12 PM | Reply | Permalink
The relationship here with Securities and the Lenders is that when the lenders sell the loans, they now have money to lend again. They have greater turnover in transactions and therefore can make a greater profit. The side effect of this is that they have more money to lend, because Wall Street is providing the funds in addition to what they can already do. This allows them to push more loans on people. In fact, it puts pressure on the loan officers to get more loans done. As a result, they look for ways to bend the rules to get loan approvals. Especially since they are not going to have to collect it later - it will go to the secondary market.
These days, the only qualification for becoming a loan officer at a bank is retail sales experience. It is not what it used to be. Loan officers need to push as many loans as possible to make more money for themselves. They could care less about what the borrower can afford.
Jim Anderson
The Truth About Credit
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Ministry WebsiteAugust 7, 2007 5:25 PM | Reply | Permalink
It's very simple. The securities market enables banks to make crazy loans.
A small, local bank has a strong vested interest in homeowners keeping their houses. Forclosure has direct, tangible costs: legal proceedings, repairs and upkeep, taxes, realtor fees, and the risk of capital loss on the sale.
There's also the intangible cost of community ill will. Banks want to be regarded as your friendly neighbor, not the heartless jerks who throw little old ladies out on the street.
Plus, vacant unsold homes are bad for all other sorts of business. They invite crime, discourage new investment and drive down property values generally.
Securities change all that because your debt is held by anonymous shareholders who have no stake in your neighborhood at all, beyond your monthly mortgage payment. Your debt is pooled into risk categories, based on your credit particulars. Investors predict that a certain percentage of borrowers will default, but they neither know nor care whether that person is you. You are a statistic to them.
August 7, 2007 5:29 PM | Reply | Permalink