Unless you've been living in a cave for a couple of years, you've undoubtedly been the target of extensive hoopla regarding the "mortgage crisis" and its effect on the U.S. and world economies. In their urgency to look like they're coming to the rescue, politicians at both the federal and state levels of government are rushing to pass various laws which look like they're addressing the problem but clearly miss the mark in nearly every respect.
The root causes of the problems we see can be found in the basic demand for "iffy" loans, because investors got starry-eyed over the returns of the associated mortgage-backed securities, without understanding the nature of the risk involved with these offerings. Apparently, those who rated the securities also failed to understand the risk, because good products were mixed with bad products, and the resulting pools of products were rated far higher than they should have been. Mortgage-backed securities were also used as collateral for other loans around the world, and were often leveraged up to 25:1, which means that even minor defaults tend to undermine the entire house of cards. Now that the true nature of these investment products has been revealed, investors have largely turned totally paranoid and thrown the proverbial baby out with the bathwater and often want nothing to do with these products; this tends to "dry up" needed and previously enjoyed available capital at an alarming rate.
Investors at all levels tend to vacillate between greed and fear, and that range has been exhibited completely in the case of mortgages and mortgage-backed securities.
Couple thousands of investors, who misunderstood the risk, with millions of borrowers, who are reluctant to live in the world of reality, and you have the perfect recipe for a genuine mess.
You don't have to be a math whiz to figure out that if you have a 6 percent loan for $300,000, for example, you're going to be paying $1,500 a month in interest alone every month ... and you'd better have some money left over for property taxes and insurance not to mention the matter of actually reducing the original loan balance as well. Buyers and borrowers should easily and quickly realize that for most of them, these are the largest transactions they will ever encounter personally in their entire lives, and they should exercise proportionate due diligence. Not rocket science, really.The problem with all the proposed and implemented remedies we're seeing is that they're directed toward the effects of the foolishness, and not the root causes. Also, there's the matter of overkill. A very small percentage of total loans fall into the subprime category, and an even smaller percentage of total loans are resulting in delinquencies and foreclosures. Most of the proposals we're seeing simply increase the cost of doing business for mortgage brokers (which gets passed along to consumers), reduce competition in the industry, and also penalize the entire industry because of the careless and blatant indiscretions of a minority of the players involved. They also follow the recent trend of allowing privatized opportunity but socializing the corresponding risk by mandating modifications to original contract terms and/or arranging for the taxpayers to bail out those who have miscalculated their obligations. While these efforts may make people feel like their representatives are addressing the problem, the politicians are really missing the mark on this one.
T.J. "Joe" Taylor is a Realtor and mortgage broker in the Salt Lake Valley.