December 11, 2007
Saving bad mortgages and the Free Market
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I see writings everywhere that people are upset with legislation to not allow a few tens of thousands of 'resetting' mortgages to default. Damn those stupid borrowers they say. Let the free market work. To me this is horrendously uninformed and naive thinking. I say.
What you espouse seems so right; so logically straight forward. It, however, for the most part is simply dead wrong and off target.
Forget entirely who made the loans, both the borrower and the initial lender. Trillions of dollars of mortgage loans were made and having been made these promises to pay became assets; account receivables to the hedge funds and institutions that subsequently purchased them.
Any middling good economist knew that excesses were going on and that with a rise in interest rates a ton of these CMO assets would default or otherwise decline in value.
So,and nevertheless, the pros, the hedge funds and their mega wealthy clients and other financial institutions still gobbled up these assets.
There was indication aplenty that the ratings were hyped on CMOs and that the financiers were buying some portion of junk assets. Caveat emptor.
In summary, the big boys bought crap assets and being leveraged their entire equity is exposed. As and if the free market was nakedly allowed to operate the big boys equity and concomitant lending resources would evaporate.
Hence the government steps in and says, "You know, the two hundred billion in mortgages that are shaky? Well, we're going to going to say that they are okay for the next cycle at least."
And you say, "Oh, they're now okay and no one needs to write off their equity and go out of business. How swell is that?"
Bottom line. The government cares not a whit that Jane, Joe, Dick or Harry will default and lose homes. They care that the big boys will tank due to their stupidity and that the credit resources of America will then hemorrhage.
Unfortunately, allowing the free market to work in this instance could be a mega disaster for all so the big money guys will of necessity be bailed out.
Jane and Joe, not so much.!
I see writings everywhere that people are upset with legislation to not allow a few tens of thousands of 'resetting' mortgages to default. Damn those stupid borrowers they say. Let the free market work. To me this is horrendously uninformed and naive thinking. I say.
What you espouse seems so right; so logically straight forward. It, however, for the most part is simply dead wrong and off target.
Forget entirely who made the loans, both the borrower and the initial lender. Trillions of dollars of mortgage loans were made and having been made these promises to pay became assets; account receivables to the hedge funds and institutions that subsequently purchased them.
Any middling good economist knew that excesses were going on and that with a rise in interest rates a ton of these CMO assets would default or otherwise decline in value.
So,and nevertheless, the pros, the hedge funds and their mega wealthy clients and other financial institutions still gobbled up these assets.
There was indication aplenty that the ratings were hyped on CMOs and that the financiers were buying some portion of junk assets. Caveat emptor.
In summary, the big boys bought crap assets and being leveraged their entire equity is exposed. As and if the free market was nakedly allowed to operate the big boys equity and concomitant lending resources would evaporate.
Hence the government steps in and says, "You know, the two hundred billion in mortgages that are shaky? Well, we're going to going to say that they are okay for the next cycle at least."
And you say, "Oh, they're now okay and no one needs to write off their equity and go out of business. How swell is that?"
Bottom line. The government cares not a whit that Jane, Joe, Dick or Harry will default and lose homes. They care that the big boys will tank due to their stupidity and that the credit resources of America will then hemorrhage.
Unfortunately, allowing the free market to work in this instance could be a mega disaster for all so the big money guys will of necessity be bailed out.
Jane and Joe, not so much.!
Labels: bail out, cmo, collaterixed mortgages, collaterized mortgages, mortgage markets, Saudi arms, sub prime
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Jane and Joe are f*cked in my estimation, but that's just me.
A woman I know marginally saw me the other day. She is a big time uber-conservative repub.
Frankly I don't engage with or argue with people who don't mean that much to me. Not worth it.
She asked if my Nyack house had sold yet and I said no... And she then said "isn't it great that the president wants to help people and will assist them?"
I thought - do I want to get into this? No.
Then I thought - but I must say something.
So very calmly I just said "I actually don't think the president is helping anyone." ( her jaw visibly drops)"I think he is trying to arrange a bail out to save the banks, investors, etc."
She just looked like she had been stung by something. I smiled - and I have a very sweet smile I must admit and said, "got to go! great to see you!"
We are all screwed these days, and sadly none of it feels very good.
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A woman I know marginally saw me the other day. She is a big time uber-conservative repub.
Frankly I don't engage with or argue with people who don't mean that much to me. Not worth it.
She asked if my Nyack house had sold yet and I said no... And she then said "isn't it great that the president wants to help people and will assist them?"
I thought - do I want to get into this? No.
Then I thought - but I must say something.
So very calmly I just said "I actually don't think the president is helping anyone." ( her jaw visibly drops)"I think he is trying to arrange a bail out to save the banks, investors, etc."
She just looked like she had been stung by something. I smiled - and I have a very sweet smile I must admit and said, "got to go! great to see you!"
We are all screwed these days, and sadly none of it feels very good.
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