H4H won't work for a lot of homeowners. It's first great drawback is
that it is for 1 family houses only. The other is that they will
only finance 90% of the loan to value. It won't work for loans in
negative amortization (borrower owes more than the house is worth or
more than the initial loan amount). There are a lot of people I have
seen in AP who took interest only mortgages. They were betting that
the property would increase in value and interest rates would stay
low or someone at some mortgage brokerage saw this as the only way to
qualify them. There's a lot of room for blame here.
I get the digest for this group so I'm not sure where Maureen asked
about the mortgages causing the bank crisis. I'm going to give a
reader's digest report on that. It used to be that banks made
mortgages and held the loans for the full term. This is called a
portfolio loan. Banks still do this with some loans, but most are
bundled together and quickly sold on the secondary market. This is
what Fannie Mae and Freddie Mac were all about. They were the buyer
of conventional loans. This kept the banks liquid and the mortgage
money flowing. Secondary markets sell stock in the future interests
of these loans - mortgage backed securities. Then the proverbial
sh*t hit the fan.
*Foreclosures and falling house values devalued mortgage backed
securities
*The seconds can't make as much money by selling shares of these
mortgage futures.
*No futures, no profit, no money.
*Investment banking was the first to feel the pain.
*No investment banking buying securities, no money flowing to the
secondary market
*no money to the secondary market, no purchases of new loans,
*no purchases of new loans, no fluidity to make more loans,
*everything crashes to a halt.
This is trickle down economics when sh*t trickles down rather than
cash.
Deregulation was a huge issue in what happened. Loans were made that
never ever should have been and this had nothing to do with CRA. It
was all about greed. See banks aren't the only ones who make
mortgages. Mortgage brokers can do this too. They are not as well
regulated as banks. Brokers are middle men. They lend other
people's money and get paid for it by the bank and by the customer.
It was a good gig. So, everyone became a broker. AIG, Merrill
Lynch, Met Life, etc. Insurance companies, financial management
companies, investment banks. You lent other people's money and got
paid to do it. The blind squirrel found a stash of nuts. When
you're lending other people's money you tend to not be very
cautious. This became especially true when the other people (banks)
weren't holding onto the loans. They thought they didn't have much
risk because all of them were looking at trickle down economics when
the trickling is gold.
There is plenty of blame to go around. Homeowners who bought houses
they could never afford - Loan Officers who used creative financing
knowing people couldn't afford the loans, but they are commissioned
and they eat what they kill - Banks who pushed their loan officers to
push expensive loans over less expensive ones for their own higher
cut - Mortgage brokers who got a little drunk on the bubble -
Regulators who kept allowing weirder and weirder loans with less and
less credit history to be considered kosher for resale - FICO and
their damned credit scoring system that eliminated human underwriting
using standards - Fannie Mae and their Desktop Underwriting which
relied heavily on FICO and allowed too much wiggle room (loan
officers could play with a loan becoming commissioned underwriters) -
Investors who bought bundled loans never looking to see if they were
good or bad loans - The system of lending money where the lender had
no risk (supposedly) and suspended due diligence. Plenty to go
around and not even worth doing.
Let's just fix it and try to make sure it never will happen again.
Though I suspect it will.
Jennifer
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