Consider the Bear Stearns Alt-A Trust 2006-7, a $1.3 billion drop in the sea of risky loans. Here’s how it worked:
As the credit bubble grew in 2006, Bear Stearns, then one of the leading mortgage traders on Wall Street, bought 2,871 mortgages from lenders like the Countrywide Financial Corporation.
The mortgages, with an average size of about $450,000, were Alt-A loans — the kind often referred to as liar loans, because lenders made them without the usual documentation to verify borrowers’ incomes or savings. Nearly 60 percent of the loans were made in California, Florida and Arizona, where home prices rose — and subsequently fell — faster than almost anywhere else in the country.
Bear Stearns bundled the loans into 37 different kinds of bonds, ranked by varying levels of risk, for sale to investment banks, hedge funds and insurance companies.
If any of the mortgages went bad — and, it turned out, many did — the bonds at the bottom of the pecking order would suffer losses first, followed by the next lowest, and so on up the chain. By one measure, the Bear Stearns Alt-A Trust 2006-7 has performed well: It has suffered losses of about 1.6 percent. Of those loans, 778 have been paid off or moved through the foreclosure process.
But by many other measures, it’s a toxic portfolio. Of the 2,093 loans that remain, 23 percent are delinquent or in foreclosure, according to Bloomberg News data. Initially rated triple-A, the most senior of the securities were downgraded to near junk bond status last week. Valuing mortgage bonds, even the safest variety, requires guesstimates: How many homeowners will fall behind on their mortgages? If the bank forecloses, what will the homes sell for? Investments like the Bear Stearns securities are almost certain to lose value as long as home prices keep falling.
Emphasis added by me.
I know Rex Hammock is thoroughly sick of my blog posts on this topic -- and I love the guy back -- but I'll continue.
Here's Rex's viewpoint:
Some of us view the world as physical scientists: we see everything breaking, declining and dying. We see that even about ourselves (and for most of us, our bodies are breaking as we age). We see it about institutions like government and media. We see it about our cities and our economies and our churches and schools — and all social structures. And some of us view the world as engineers: we see all things — especially broken things — as something that needs improving or fixing — and that can be fixed. And we start looking for the right tools.
We need scientists and we need engineers.
I love them both but I was wired to be an engineer.
Yes, that's very nice.
But human beings who are wired to be financial sociopaths -- and make no mistake, baby, these are financial sociopaths -- are not amenable to being engineered by laws into compliance. See "liar loans," above.
But Rex likes solutions. So I will give one small solution here. No one will think this has a chance in hell, but I do.
First, what is their definition of "mortgage default?"
Do they mean people were faithfully paying the mortgage until the loan shark rates kicked in and doubled or even tripled their monthly payment? Which is it? Default of the first or default based on being cheated? That's a very, very important distinction.
How many of you out there think a loan shark should prosper and his victims suffer?
I think the loan shark should suffer, not his victims.
If home owners were making payments before the fraudulent balloon kicked in, these people should not lose their homes. The loan sharks should suffer. This would 1) preserve the value of the home, 2) preserve the neighborhood, 3) teach the loan shark a lesson.
If home owners defaulted on payments well before the balloon kicked in, sorry, but that's life, and you lose. Yes, I'm sorry you lost your job or your health, but this has happened to others before you. You can't have a free ride here.
Now what to do about all those empty homes? There are entire developments that are literally new ghost towns. The houses are unsold, they have no market value, and in fact their decrease in value accelerates due to lack of maintenance and vandalism. Value is being erased here.
That should stop.
Since the government -- meaning every single one of us -- is going to be the owner of these properties, the first priority should be to preserve the value of these homes and find a way to increase their value without the fraud Wall Street has used.
So: hold a lottery for the homes.
The rules are this:
1) You must be at least a second-generation American (tough shit to you PC people; they would do this in every other country, so it should happen here too).
2) You must live within 100 miles of the lottery home location.
3) You must currently have a job with good prospects and a solid work history.
4) You must pass a drug-screening test.
5) You must have never been convicted of a crime or ever involved in domestic violence.
6) You must not be in default on any credit.
7) You must be able to afford a reasonable government-backed mortgage.
8) You must make a commitment to stay in that home for at least five years.
9) You cannot trade or sell the home for those five years.
10) You cannot take out loans based on the value of the home.
11) If you vandalize the home, you are on a national blacklist that prevents you from ever getting any kind of loan or public assistance.
12) The price of the lottery ticket is $100.00. You can only buy one ticket per family per lottery.
Now this is only a broad outline. I'm not here to give free labor to the government. The rest Fannie Mae and Freddie Mac and FHA and all the others can come up with.
But this at least one solution. Get people in those homes, preserve the value, make it possible to increase the value, and stem the zeroing out of our entire financial system.
And for all those financial sociopaths who thought they could defraud their way to riches?