What Mortgage Crisis?

With all of the press coverage about the "Bailout", the basics have been ignored. This is supposed to be a crisis brought about by the collapse of the mortgage industry and of borrowers. IT ISN'T, at least not when you get to the fundamentals. Here's why:


It used to be that when a potential home-mortgage borrower wanted money, the borrower would go to a lender, meet face-to-face the banker (now called "loan originator"), and discuss the request, giving the banker a full financial history and detailing the borrower's plans. The banker would take the information, say "thank you", complete a credit analysis, ultimately saying "YES" or "no"! That banker and the banker's institution was on-the-risk for the mortgage loan. If too many loans went bad, the bank lost money and the banker was fired.


NO MORE is it so simple. There are layers and layers between the loan originator and the end-owner/lender for that mortgage. In fact, the loan has probably been put together with thousands of others and sold as a package to investors, like mutual funds and even us, regular people. The packagers of the loans slice and dice them and sell pieces - if there are 2,500 loans averaging $200,000 each (some $75,000, some $500,000) there is a package, now called "securitization" of $500,000,000 or 1/2 billion dollars. An average interest rate is calculated, the securitizer figures its costs and a profit, determines how much of the interest the pool can pay to investors, and then offers pieces of this big pool of loans for sale. The buyers? Mutual funds, retirement plans, state and local governments, and maybe you and I (but I got out a year ago). These financial instruments are BONDS, not unlike the bonds corporations and municipalities issue; these bonds have a special name - "Mortgage-Backed Securities".


NO LENDER, NO ENTITY IN THE CREATION OF THE SECURITIZATION (POOL), HAS ANY RISK FOR THE INDIVIDUAL LOAN WHICH WAS MADE BY THE LOAN ORIGINATOR. NO ONE GETS FIRED FOR LOANS THAT GO BAD. NO ONE IS "ON-THE-RISK"!


Well, almost no one - except all of the investors who bought pieces of the pool. There is the problem. HOWEVER, contrary to what you may hear THE SKY IS NOT FALLING!!!


The next entry will explain why, and it will be out before Congress has time to dither more.
http://www.isacofflaw.com/