House of Cards: Collapse of the Mortgage Market
Sometimes you have to wonder what country we’re living in. Reading Christy’s post on tent cities and food rationing, contemplating a trillion dollar war and $4 a gallon gas, you just want to shake your head and wonder how the hell things could slide down so far so fast.
On the political side we see that the usual checks and balances on a power-mad executive have been damaged: Congress, what’s left of the judiciary, the Mask Media, and intimidated whistleblowers.
And on the economic side, you can imagine where this is going, the same prosperity-loving administration — and by prosperity-loving, I mean for the insiders, not the little people out there — has removed most of the checks and balances from the financial world as well.
Calculated Risk heaps scorn on the regulatory incompetence:
Shocked? Homebuyers were speculating with no money down. Mortgage brokers didn’t care because they would sell the loans immediately and collect their fees. Wall Street didn’t care because they could package the loans and sell them to investors.
Investors would have cared, except they trusted the rating agencies.
[snip] …the rating agencies weren’t evaluating the underlying loans – they were performing statistical analysis using models based on lenders that cared if the borrower would repay the loan.
At the same time, regulators – despite numerous warnings – mostly ignored the problem, apparently for ideological reasons ("let the free market work"). What a mess. [bold added]
Ian Welsh has given us an overview of the mortgage crisis and proposals for how to unwind this tangled mess. Kevin Phillips joined us last week for Book Salon to discuss how the government systematically removed all the guardrails from the financial markets.
Blame where blame is due: the repeal of Glass-Steagall ripped down the firewall between banks and non-regulated financial firms during the Clinton administration. Then the Bush-Cheney administration finally found something where they were competent: tearing down all the remaining regulations keeping investment firms from going bonkers with the nation’s savings.
So, whee! Anybody can start an investment firm, buy a bank, and have the bank invest in their
gambling habit stock manipulation great ideas. I mean, what could go wrong?
Do you have a bank account, a pension plan, a mortgage? You could be in trouble without knowing it. Your bank account is probably not FDIC insured, ever check the fine print about that "new kind of account" that they switched you over to, to get more interest? Your mortgage, if taken out recently, might have a clause that allows the monthly payments to double or triple.
If you try to sell your house, you are caught in a market where housing prices are falling [of course, this is good news for people trying to buy houses, silver lining]. People who were counting on selling their homes to get retirement funds are about to get some sad news: home prices are likely to plummet in the next year, and will not recover for several more years.
Millions of people are already "underwater" where the value of the house is less than the money still owed on the mortgage and home equity loans. Millions more will be there soon.
If you have an IRA, company pension plan, or life insurance, or live in a city or state with pension investments, you will be affected by a different kind of crisis in the mortgage market. There have been so many weird kinds of investment vehicles based on
fairy tales unfounded assumptions about how much various kinds of mortgages are worth, that no one really knows the value of them.
The tricky part is that financial firms have traded so many of these complicated financial products back and forth with each other that this is where we are now:
Everybody owes everybody else like a giant web of spidersilk. And what holds it together? Housing prices, which are collapsing.
We are beginning to see banks and investment firms write off billions of dollars in losses every quarter, and this will continue for many months. Small and medium size regional banks are in for a world of hurt.
The great unwinding will be painful as shaky investments are settled for pennies on the dollar. The good news is, we’ll become poorer only gradually if this process happens slowly. But what if the whole thing starts falling apart all at once?
It’s a house of cards. And the wind is blowing.