Beggin' the Captain's Pardon

Was that the President of the United States on television the other night, explaining how MBS's work? Holy Crap -- now that's a sight that I would have never guessed would happen (although it needs to happen more often -- let's never forget the power and benefit of too much information). As a card-carrying member of the residential mortgage financing consultant community, I thoroughly enjoyed watching the POTUS run down the schematics of investments collateralized by Mortgage Backed Securities...until he directly blamed the sub prime house financing mismanagement for this crisis. Uh, No, Mr. President, that is not correct. This mess started long before 1999 when FNMA (Fannie Mae) and FHLMC (Freddie Mac) loosened their underwriting guidelines so that borrowers with less-than perfect credit can qualify for home mortgages.
Most of us who have worked (and/or are currently working) in the financial field know that this all started over 25 years ago on Wall Street when Salomon Brothers began the collateralized investment pools. If you really want a good "primer" on this subject, I suggest you buy the book "Liar's Poker" by Michael Lewis and give it a good read. You will come away with the knowledge that the seeds of nouveau greed were planted at that time, and it changed with the tides as each endeavor was crushed. Greed just moved and assimilated from one opportunity to another. From junk bonds to MBO's. From MBO's to Internet stocks. From Internet stocks to sub-prime housing. From sub-prime housing to Credit Default Swaps. And on it goes. Another good reference book is "Den of Thieves", by James B. Stewart. Check them out and tell me your thoughts -- I think you will agree with me that it's the system that's generating this economic virus.
The other day, I was talking to a guy who asked me what I did for a living. When I told him that I was a mortgage loan officer, he immediately recoiled and, in raised voice, said "so you're the guys that are to blame for this mess!" and gave me a sideways glare. I was not amused. I couldn't decide what disgusted me more: his utter ignorance or his easily manipulated viewpoint that (most certainly) came from some pablum morning "news" show. I shot back with comments about how he shouldn't be so quick to judge without knowing both sides of the story, and it's unfortunate that most people jump to conclusions before raising their level of awareness, especially when everyone knows that bad news sells more newspapers and gathers more viewers -- it would be great if people were more likely to question the media and seek the truth, if not both sides of the story. Then began the backpedaling, but it was too late for me; I marched on with the explanation that it's not my fault that John Q. Public doesn't understand how to budget his finances and not try to live beyond their means.
Affordable house financing was a boon to Wall Street, but we now see that the good times were all artificial. Loan officers worked hard to help more people reach the American Dream of homeownership. The only problem was that we did such a good job of restructuring personal debt service that Mr. and Mrs. Public became aggressive consumers. Let's get a newer car with more extras! Let's get a newer computer with more bells and whistles! Let's get that jumbotron-like flat screen tv! Ipods! Cell phones -- We need another, more expensive phone and an equally expensive minutes plan, because it's not enough to just have a land phone! Satellite or digital cable tv to go with that fancy flat screen tv! It goes on and on. Suddenly Mr. and Mrs. Public are deep in debt, and guess which payment doesn't get made? The largest one -- the mortgage payment. And most people don't realize that the absolute worst thing to do to damage your credit (outside of filing for bankruptcy) is to default on your mortgage payment. Most underwriting can forgive and work around history of late payments on consumer credit accounts (provided there's a reasonable explanation of a one-time event, in writing from the borrower), but there's no forgiveness for late mortgage payments. It's a message that gets easily lost in the moment, until the time comes when new credit is needed, and by then it's too late.
So I say to you, Mr. President, and also to you, members of Congress, in all due respect, please raise your level of awareness. It's not the mortgage crisis that's causing this sickness in the markets -- it's the system that allowed the greed to fester and manifest itself within our free market economy. Your $700 billion relief package is nothing more than a bandage on a deep flesh wound. The problem runs deeper than that.

The Wall Street financial crisis is blowing up in our faces...or so we are being told. Are you like me and are wondering just what exactly justifies a price tag of $700 BILLION dollars? Why not $500 billion? Why not $100 billion or even $7 billion? Plus, we're being told that this must happen NOW. What is the reference point? Why not disclose what's behind all this? Or are we not being told because no one really knows? Let me know what you think. More to come...