Originally Posted by TropicCat
Yesterday the State of Connecticut filed a civil suit against the bond rating companies claiming conflict of interest in their role of turning sub-prime mortgages into AAA rated Mortgage backed securities.
When I read this brief notice, it got me thinking about the housing market collapse all over again and revisiting the reasons why it's not going to recover any time soon. As a matter of fact, the worst is yet to come.
Most people don't realize that the GSEs (Fannie Mae and Freddie Mac) were constructed to take mortgages from banks and securitize them decades ago. The practice was distorted and abused recently, when banks were essentially allowed to do the same and sell sub-prime Mortgage backed securities (MBS) to investors. When these mortgages began failing, both the housing collapse and the financial collapse resulted. It's stating the obvious to point out that if folks paid these mortgages on time, there would have been no crisis to begin with, and both the housing crisis and the banking crisis would have been avoided along with this Great Depression we find ourselves in.
If that were the end of the story, new banking rules would have been quickly enacted and we'd be out of recession by now. Unfortunately it's what isn't being discussed that's the real force driving both mortgage defaults and the recession. You see Fannie Mae and Freddie Mac are insolvent. As a result of the financial meltdown, they were left as the only buyer of mortgages and are now losing money faster than anyone can count.
If you 'look under the hood', you learn fairly quickly that these loans they've been buying are defaulting at a record pace, resulting in losses. Why would they be buying loans that will default is the obvious question? The answer to that question rocks the foundation of the US economy, and is the reason no one is asking.
As America shed jobs and family incomes began shrinking, traditional mortgage guidelines were adjusted to make it possible for people to buy a home. The 'line' was crossed in 2001 when the latest adjustment to guidelines allowed the issuing of Sub-prime first Mortgages. Until then sub-prime was restricted to 2nd mortgages. The reason for the relaxed guidelines? It was because fewer and fewer people could qualify for the traditional, conservative mortgage. Why? Because their incomes no longer were increasing, and in fact were shrinking. Under the old guidelines, the entire mortgage industry would have either come to a screeching halt or at the very least slow considerably, and as we all know, construction and sales of residential properties is a big chunk of our economy. No administration was going to allow this to happen, so guidelines were relaxed. It didn't hurt that low mortgage rates created a feeding frenzy, but when the rest of the economy was tanking, this hid the problems nicely.
Fast forward to today and we find that even without the banks (or rating agencies) playing any role at all, the GSEs are now in big trouble instead. The path to mortgage securitization was restored, but the underlying market fundamentals remain the same. The relaxed mortgage guidelines just don't work and if we restore them to what they ought to be, housing (and our economy) will not recover in our lifetimes.
The problem with the American economy was never... ever... housing, or even mortgage (directly) defaults. The problem was and still is that the middle class in this country is disappearing. Most can't afford a home today.
Instead of passing more unemployment benefits, Congress should be addressing the real problem and stop dealing with the symptoms. If they do not, I can only conclude that it's their plan to reduce America to third world status. This simply can't be allowed to happen.
Just my opinion
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