Home Mortgage Market Crash Or Bounce - Road to the Middle Class

PERHAPS THE most radical change in the financial markets in the last generation has been the securitizing of home mortgages, the bundling of home mortgage obligations into mortgage bonds which are then sold to investors.

But Lewis Ranieri, the Wall Street guy who is credited with creating the market is worried that risky mortgages are creating a problem, according to Patrice Hill.

Banks and mortgage brokers have been passing along to unwary investors as much as $600 billion a year in risky mortgages they made through untested channels in the junk-bond market. That raises the threat of a financial crisis beyond the ability of the Federal Reserve to remedy.

Now the point here is that this is not the same as banks holding risky mortgages. Banks are uniquely vulnerable financial institutions because they inherently make promises they cannot keep. They promise to pay to their lenders (depositors) on demand monies that they have lent out long term. They cannot pay back all their creditors at once. If mortgages held by a bank go bad then there is a risk of systemic financial failure, like in the Great Depression.

But mortgage bonds are different. If the mortgages behind an issue of mortgage bonds go bad then only the bondholders suffer the losses. There just isn�t the same level of systemic risk.

Obviously, there is still risk.

Bank regulators told the National Housing Forum here yesterday that they have found major banks punting to investors questionable mortgages they could not legally keep in their own loan portfolios. Mr. Ranieri said brokers on Wall Street have raised the risks by repackaging the mortgages in deceptive and opaque ways so that the small investors and foreigners who buy them are unable to understand the risks.

"No securities market can stand if we do not have true disclosure, and we do not have true disclosure" of the growing risks of exotic mortgages whose payments can double overnight and force buyers into default, said Mr. Ranieri.

The financial markets are in the business of selling paper. And they do what it takes to get the paper out there. No doubt, stuff �gets sold to the public and to foreign investors who don't have a clue what to look for.� Happens all the time. And willy-nilly, the fact that a mortgage bond has junk-bond status should be telling the investor something.

Rep. Barney Frank (D-MA), incoming chairman of the House Financial Services Committee, seems unconcerns about the risks. �If a few speculators get burned, that's just icing on the cake.�

Probably the big take-away is that

Some banks are selling the questionable loans to investors to avoid keeping them in their portfolios, where they would be unacceptable to regulators.

That is exactly what bank regulation is supposed to do. The systemic risk of bank default is due to the concentration of risk in a few financial insstitutions. But when the risky mortgages are sold to investors then the systemic risk is removed. The concentrated risk proposition is diluted as the risk is allocated to thousands of bond holders.

Of course, the question: is how many public employee pension funds have picked up the risky mortgage bonds? And then there are Fannie Mae and Ginnie Mae, the government sponsored mortgage-bond issuers, who are already in trouble with their financial shenanigans. But then in the worst case taxpayers would have to pick up the shortfall. And who cares about them?

The real risk is that if the sub-prime mortage market contracts sharply then the reduced supply of mortages will be reflected in further house price declines. That would turn off the home equity ATMS. And that could spread to the whole economy.

Sphere: Related Content |

Christopher Chantrill blogs at www.roadtothemiddleclass.com. His Road to the Middle Class is forthcoming.

TAGS

Chappies

“But I saw a man yesterday who knows a fellow who had it from a chappie that said that Urquhart had been dipping himself a bit recklessly off the deep end.” —Freddy Arbuthnot
Dorothy L. Sayers, Strong Poison

Civil Society

“Civil Society”—a complex welter of intermediate institutions, including businesses, voluntary associations, educational institutions, clubs, unions, media, charities, and churches—builds, in turn, on the family, the primary instrument by which people are socialized into their culture and given the skills that allow them to live in broader society and through which the values and knowledge of that society are transmitted across the generations.
Francis Fukuyama, Trust

Hugo on Genius

“Tear down theory, poetic systems� No more rules, no more models� Genius conjures up rather than learns� ” —Victor Hugo
C�sar Gra�a, Bohemian versus Bourgeois

Education

“We have met with families in which for weeks together, not an article of sustenance but potatoes had been used; yet for every child the hard-earned sum was provided to send them to school.”
E. G. West, Education and the State

Faith & Purpose

“When we began first to preach these things, the people appeared as awakened from the sleep of ages—they seemed to see for the first time that they were responsible beings...”
Finke, Stark, The Churching of America, 1776-1990

Conversion

“When we received Christ,” Phil added, “all of a sudden we now had a rule book to go by, and when we had problems the preacher was right there to give us the answers.”
James M. Ault, Jr., Spirit and Flesh

Postmodernism

A writer who says that there are no truths, or that all truth is ’merely relative’, is asking you not to believe him. So don’t.
Roger Scruton, Modern Philosophy

Faith and Politics

As far as the Catholic Church is concerned, the principal focus of her interventions in the public arena is the protection and promotion of the dignity of the person, and she is thereby consciously drawing particular attention to principles which are not negotiable... [1.] protection of life in all its stages, from the first moment of conception until natural death; [2.] recognition and promotion of the natural structure of the family... [3.] the protection of the right of parents to educate their children.
Pope Benedict XVI, Speech to European Peoples Party, 2006

China and Christianity

At first, we thought [the power of the West] was because you had more powerful guns than we had. Then we thought it was because you had the best political system. Next we focused on your economic system. But in the past twenty years, we have realized that the heart of your culture is your religion: Christianity.
David Aikman, Jesus in Beijing

Religion, Property, and Family

But the only religions that have survived are those which support property and the family. Thus the outlook for communism, which is both anti-property and anti-family, (and also anti-religion), is not promising.
F.A. Hayek, The Fatal Conceit

Conservatism

Conservatism is the philosophy of society. Its ethic is fraternity and its characteristic is authority — the non-coercive social persuasion which operates in a family or a community. It says ‘we should...’.
Danny Kruger, On Fraternity

US Life in 1842

Families helped each other putting up homes and barns. Together, they built churches, schools, and common civic buildings. They collaborated to build roads and bridges. They took pride in being free persons, independent, and self-reliant; but the texture of their lives was cooperative and fraternal.
Michael Novak, The Spirit of Democratic Capitalism

mysql close 0