Post Mortem

I suppose this is an autopsy considering that the housing market died a very sudden death. If there were such a charge as murdering an economy a goodly portion of the population would be standing trial.

The floodgates opened when the reservoir of foreign capital overwhelmed the pool of potential investments in the U.S. The overseas investors were clamoring for a return on the money they were pouring into good ol' rock-solid America. Wall Street, never one to ignore a customer asking for advice on how to maximize yield, rose to the occasion.

And they whispered into the customer's ear, “Home Mortgages & Derivatives.”  Financing the American dream. A 30 year return guaranteed by FannieMae which everyone knew wasn't really an independent agency, but an unofficial arm of the U.S. Government.

So, lots and lots of money was pushed into one end of the pipe and delivered to hundreds of thousands of 'taps'...mortgage lenders ranging from highly reputable to, as in a number of cases in Florida, convicted con-artists. The next step was to find people that wanted money to buy a property, or even better, people that attended seminars on how to leverage multiple properties.

Stating that the buyer was going to occupy the property as a primary residence was a common practice. Even more fraudulent was the stated income loan where any buyer with a reasonable credit score could claim almost any amount as income as long as it was sufficient to meet the payments. These practices were encouraged by mortgage lenders who often filled in the application for the borrower in order to make it meet the right profile to qualify for a loan.

The most fraudulent practitioners worked with, and in some cases for, builder/developers which led to the sales of thousands upon thousands of homes to people with little or no ability to make the payments. It was a ticking time bomb that a long assembly line of people were paid to build. The line started at the mortgage agent's desk and stretched through the banking system back to Wall Street. Everyone got a check, often a very big check. Everyone was happy, for a while.

Once speculators entered the market it became a Wild West free for all. A modern-day Gold Rush.  More and more homes were built to satisfy the demand for short-term profit, called 'flipping'.  Subdivisions were full of homes that buyers never intended to live in.  At the same time, the same builder/developers were competing with their 'flipper' customer by building and selling homes that were funded for unqualified residents through dishonest in-house mortgage operations.  Many subdivisions were sold out without even one home in a hundred being bought with a down payment. Beyond this supposedly legal market there was out and out fraud. We had, for the most part, a mortgage system driven by greed satisfied by people willing, and encouraged, to ignore the most basic rule of money-lending: only lend to those with an assured income sufficient to meet the debt.

And the rest is history. There's nothing to be gained by re-hashing the total collapse of the world economy awash in bogus mortgages and the impossible to comprehend 'derivatives'. Will it happen again? The collective memory is short on Wall Street, and in the regulatory agencies, too. It will.

And they're at it already. I just read last week that the latest Wall Street gimmick is to bundle life insurance policies into the same derivative packages as they did with mortgages. I haven't figured out how that's going to work...well, it might if we all live forever and keep paying those premiums.