Sunday, October 05, 2008

The Demise of Mortgage Derivatives

The demise of mortgage derivatives is a justifiable stance, given the 2008 circumstances surrounding the economic problems. I do not know who profited from the multiple sales of these questionable ‘assets’, but I do believe the law can track it down.

I see these foreclosed properties described as assets. These ‘assets’ act like liabilities to the businesses that possess them. It is suggested that these businesses receive nothing for foolishly investing in an overbuilt housing market.

Foreclosures to be sold on the discount market will be offered to the original borrower at the same rate as the discounted before being sold.

Mortgage backed securities should not be sold or purchased. Profit from mortgage lending is the interest, not mortgage related products. This attitude should be discouraged and not paid off in cash. I know that people made money selling these mortgages but the word is getting around that the original paperwork for these loans is lost because they were sold so many times.

No cash payouts to any of the executive personnel. Put them out on the street with nothing like a fired worker. Replace executives and reorganize entities and let the clerks keep their jobs.

Mortgage lending will not resume at the former pace during the boom or bubble. This industry will not support the former number of workers. This includes construction, lending, appraisers, realtors, title searchers and others connected to construction.

Require down payments for loans, raise the interest rates until saving becomes more lucrative and sit back and wait for people to save down payments and practice good money management. This will take years.

Allow the prices of homes to deflate and give all mortgage payers the same options available under the bailout for troubled borrowers, if the prices of the homes are devalued for mortgage purposes. This is only fair to those who met their obligations. These people should be rewarded, not looted. This is an easier mechanism for returning the housing market to normal (defined as units produced=units needed, units needed is defined as qualified buyers).

Favorable outcomes in managing foreclosures should be maximized and a mechanism for managing the foreclosures needs to be in place. The following concepts need to be in the comprehensive plan.

Continuation of Occupancy:

Foreclosures to be sold on the discount market will be offered to the original borrower before being sold. Go ahead with foreclosures while offering a deal whereupon the inhabitants of the home may apply to buy the home at a discount rate equal to the discount rate offered to bulk purchasers of this land and housing. If the buyer is able to qualify (a not yet defined set of circumstances), then the occupancy will remain undisturbed. Continuation of occupancy is a desirable outcome.

Increased flow of capital:

Reselling the homes at bargain rates, as is condition, would start up a cottage industry of fixing up and renting or reselling homes. Homes are not selling because they cost too much. Devalue these foreclosures and resell at market conditions. If the houses are cheaper, then more people could buy them. Avoid real estate price fixing just to shore up bogus securities. Limit more housing development until the market stabilizes. If people are upside down in their mortgages, then let them deal with it. I suggest a voluntary program wherein mortgage payers could quit and vacate in good condition without penalty.

Break up bundles of mortgage based securities:

Localize dealing with foreclosures. Sort the mortgages into categories and local areas. Set up local entities in existing government buildings to administer foreclosures and new loans and discounted cash sales. Localized banking entity would administer loans locally (within a radius of locale). Selling the mortgages would be on a case by case basis, and not to be bundled and sold for administration elsewhere. Land is local and administration of debts on it should be a local business.

Mortgage derivatives should not be permitted because the impetus for their creation and sale has nothing to do with the true purpose of mortgages, which is to get people in homes and provide capital for businesses.

The basis for mortgage lending is noted to be the socio-economic continuation of the society and these needs should determine the progression of this profitable enterprise. When the policy mechanism that created subprime lending was introduced, then the purpose of mortgage lending no longer remained to provide housing: the purpose of mortgage lending became a golden goose that provided unlimited capital and no responsibility to administer the loan and a lucrative outlet in selling mortgage derivatives.
Thus the purpose of mortgage lending became to produce as many mortgages as possible in as short a time as possible in order to maximize profits. Legitimate lending was swamped in the flood of undocumented lending.

Halting the sale of mortgage backed securities is necessary. Local administration of the loans is necessary and the success of lending policies will lead to capital infusions. As for the null and void mortgage securities, line up to the right, after the taxpayers. All this will take time, much time.

In summary, the purpose of mortgage lending should be defined as a social need in the realm of shelter and that this need should not be used as a cash cow for brokers, the new definers of what is valuable in our society. Mortgages can return to the local and the collection of the debts will remain in the community. These debts will no longer be collateral for other loans and investments, but will remain what they are: needs in the community to provide housing.

We are facing a financial slowdown as the population of the Earth forces the division of scarce resources times the number of mouths to feed. Overpopulation and the recognition of the finite quality of the Earth’s resources force our economies into depression as a monetary crisis hits the world. Interest rates are too low in an effort to prop up the housing market. Face it. Worthless ‘securities’ were sold and sold again and somebody got cheated but now investments in the USA are perceived as no longer solid and people don’t want to lose money by investing in the USA. To those who profited by these deceptions, was it worth it?