Re: [MLUG - DISCUSSION] ideas about housing crisis

["Jonathan King" <EMAIL:PROTECTED>]

On 2/1/08, Mike Miller <EMAIL:PROTECTED> wrote:
> "60 Minutes" ran a segment on the "mortgage mess" the other day:
>
> http://www.cbsnews.com/stories/2008/01/25/60minutes/main3752515.shtml
>
> After seeing that, and other things, here's what I'm thinking happened:
> Many people will always want to buy houses for little or no money down,
> but they usually can't get a loan.  Banks were giving them loans anyway,
> sometimes for even more than the home was worth.  Why?  Well, they didn't
> quite say so on "60 Minutes", but putting two and two together, I think
> the reason is that they knew the home values were increasing and they
> would foreclose on people and turn a profit.  Why else would they give
> them low interest for the first year, doubling in the second year to a
> level that the owner could not pay?

Actually, that's not it at all. You are totally wrong here. Let me explain.

1) Banks tend not to hold onto mortgage loans these days; they sell
them off to people who securitize them into CDOs and the like.

2) Because there was a large demand for higher-yielding mortgages to
roll into CDOs, there was strong demand for sub-prime loans, which led
to...

3) High fees for *mortgage brokers* to get the deal done. The brokers
never had any skin in the game unless or until they were forced to buy
back loans that imploded too soon, which did in fact happen in 2007.

So the people taking out the loans had an incentive to do it. The
people brokering mortgages certainly had a cut. The people creating
CDOs had a big interest in keeping this going. The people who were
stuck holding the bad debt were really screwed. The fact that housing
prices were going up fast was also, of course, used as a justification
for approving dubious loans, but the intent was not to foreclose,
because that loan would be held by somebody in Dusseldorf or Chicago
by the time that the people mailed the keys back in Florida.

jking

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