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DanKarmelSecondPaper 9 - 19 Apr 2010 - Main.DanKarmel
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< | The critical element uniting all the players, whether they believed that real estate was never going to die, or whether they were prepared to make billions pushing it over, was that no one bore the risks for their bad investments. Mortgage lenders originated the loans and would generally sell them in huge pools to investors within weeks, sometimes days. The loans were then passed along and cut up through various entities, all the way up to the government-sponsored Fannie Mae and Freddie Mac. At both the front and the back, the ones usually left holding the bag were the original borrowers and the government-sponsored corporations. Even the major credit rating agencies, like Moody’s and Standard and Poor’s, the entities most in need a proper perspective on risk, were paid by the banks issuing the securities they were rating, and thus similarly created risks for which they were in no way accountable. It would be as if “Hollywood studios paid movie critics to review their would-be blockbusters." So to answer the question of why the really smart finance guys didn't figure out that they were building a house of cards - they had no incentive to. | >
> | The critical element uniting all the players, whether they believed that real estate was never going to die, or whether they were prepared to make billions pushing it over, was that no one bore the risks for their bad investments. Mortgage lenders originated the loans and would generally sell them in huge pools to investors within weeks, sometimes days. The loans were then passed along and cut up through various entities, all the way up to the government-sponsored Fannie Mae and Freddie Mac. At both the front and the back, the ones usually left holding the bag were the original borrowers and the government-sponsored corporations. Even the major credit rating agencies, like Moody’s and Standard and Poor’s, the entities most in need of a proper perspective on risk, were paid by the banks issuing the securities they were rating, and thus similarly created risks for which they were in no way accountable. It would be as if “Hollywood studios paid movie critics to review their would-be blockbusters." So to answer the question of why the really smart finance guys didn't figure out that they were building a house of cards - they had no incentive to. | | | After The Sale | | | Wall Street was playing the game. They took their risks and they certainly knew how to walk away from a bad deal. Why aren't individual borrowers allowed to play the game too? Instead, they are the ones being called upon to make good on the moral obligations that are somehow being read into the contracts. What are the things that mortgage companies do to altercast their borrowers into a certain role? For one, they call the borrower a “homeowner.” Of course, there’s a difference between that and owning your home free and clear. Yet the mortgage industry wants you to be a homeowner right away, regardless of what sticks you get in that bundle - because why would a homeowner walk away from the home he owns? | |
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< | It's not only the actor that's being cast in a certain light, but the deal itself which is being burdened with all sorts of extraneous notions. Leff notes that we are a society that is skeptical of gifts - "You don't get something for nothing." For borrowers whose homes are underwater, the problem is not that they were mistakenly convinced they were giving something in return, but rather that they're mistaken about exactly what that something was. When you take a mortgage, you borrow money in exchange for a promise to either pay it back or forfeit the security. Banks can lend money to the government for 30 years at a rate of 4.625%. Borrowers need to look at the rates they are paying on their mortgages and ask one simple question - why are they charging me more and what does that mean about the promise that I made? Once they understand what that promise actually was, they will know it was not to help the bank hedge its bets. | >
> | It's not only the actor that's being cast in a certain light, but the deal itself which is being burdened with all sorts of extraneous notions. Leff notes that we are a society that is skeptical of gifts - "You don't get something for nothing." For borrowers whose homes are underwater, the problem is not that they were mistakenly convinced they were giving something in return, but rather that they are mistaken about exactly what that something was. When you take a mortgage, you borrow money in exchange for a promise to either pay it back or forfeit the security. Banks can lend money to the government for 30 years at a rate of 4.625%. Borrowers need to look at the rates they are paying on their mortgages and ask one simple question - why are they charging me more and what does that mean about the promise that I made? Once they understand what that promise actually was, they will know it was not to help the bank hedge its bets. | | |
You are entitled to restrict access to your paper if you want to. But we all derive immense benefit from reading one another's work, and I hope you won't feel the need unless the subject matter is personal and its disclosure would be harmful or undesirable. |
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