The Nonrefundable Mortgage Crisis

Students of the Financial Crisis need to read this article by Barry Ritholtz. What is not said is the basic Policy which led to the Crisis, which was the decision throughout the financial world to join Wall Street. Leadership decided to leave Banking behind, and design a new system which could be Bought and Sold just like Stock. Normal Rules of Lending were abrogated, and a uniform component of Profits-taking was introduced, where Instrument creators were granted an average 8% of the total funds up-front for having written the Instrument. They grabbed, pressured, or bribed their way into a good Credit rating for the Instruments, then went to Town in selling them; a practice where they were distributed prior to any Foresight measurement determining the intrinsic Recovery value of the Instruments.

The entire program relied on low Interest rates, so that the up-front Profits-Taking could be hidden from both Borrower and Investor. Instrument Creators carefully crafted the Instruments so that they were shielded from liability after the Period where their Profits-Taking was accomplished. The low Interest rates were necessary so that Mortgages could be refinanced under difficulty, with the doubtful Mortgage could be Paid and replaced with another doubtful Mortgage at greater cost, and less Advantage to the Borrower. The two most important factors in the refinance which Borrowers did not follow: 1) that they would pay off the previous Mortgage with the refinanced Mortgage; and 2) that they had paid off a significant amount of the first Mortgage, so that the refinanced Mortgage could be extended for a standardized Period, and the Instrument Profits-Taking could be absorbed by the new Mortgage. Low Interest rates were absolutely mandatory for the second provision to work out; the rates determining the rate of repayment of the debt.

These Mortgages had many Strikes against them from the Beginning. The first factor working against successful operation was the enhanced Construction Costs incurred with the Property itself. Realtors were inflating normal Construction Costs by economic profits, normally about 10% in the rising Real Estate market. Bankers were lowering the Credit ratings necessary for Borrowers to attain a Mortgage, truly ensuring that the later had too great an amount of their Incomes devoted to Mortgage repayment. Instrument Authors insisted on up-front Profits, and the limitation of liability to the Period of completion of Sale, isolating both Borrower and Investor from the renegotiation capacities of Mortgages; Some might have doubt as to the later, but the intervening Second Party has been freed from liability, freeing them from the economic necessity of Contact with either First, or Third Parties. The interruption led to Severance of Contact. The Instruments were written in form almost demanding refinance (obvious benefit to Profits-drafting Creators of financial instruments), but eliminating any Referral process with the elimination of Second Party liability. The real amazement was that the resiliency of the American economy sustained such Mortgage practice, until it threatens to bring down the entire system. lgl