So let me get this straight:
[li]Mortgage brokers in the ‘90’s/early 2000’s made a substantial number of sub-prime loans to borrowers with fair-to-poor credit. This increase was due in part to elimination of many states’ interest ceilings on loans–justifying the “riskiness” of the loan–and an increase in access to capital markets, i.e. these loans could be re-sold as investment securities. Most of these original loans were (1) adjustable rate mortgages, where after 2-5 years the rate ratcheted upward and increased the expected payment, or (2) interest-only loans with a large balloon.[/li]
[li]Said brokers then sold the loans to investors–who could repackage the securities so that they received a higher investor rating–and they in turn sold them to hedge funds.[/li]
[li]An increased number of original borrowers–not unexpectedly–begin to default on the loan as interest rates increase. Although some try to re-negotiate the terms of the loan, the number of parties involved with the mortgage–one company owns the mortgage, another processes the payments, another is a trustee for the investors, and all most likely in different states–makes re-negotiation next to impossible.[/li]
[li]Mortgage brokers and associated hedge-funds begin to go bankrupt. Amazingly, some of these bankruptcies are liquidated in the Cayman Islands, which allows the bank to invoke the 2005 bankruptcy law and so block lawsuits against the fund. That same law can make it more difficult for the original home owner to declare bankruptcy. There is even talk of a government bailout similar to the S&L crisis of the 1980’s.[/li][/ul]
Does anyone here substantially disagree with the above analysis? I’m no finance expert–and perhaps I have some of the details wrong–but this is essentially the problem, isn’t it?
If so, I say screw the lenders/hedge funds/investors. These guys knew or should have known exactly what the risk of this kind of “investment” was; the fact that they lobbied Congress so hard for the very laws that allowed this mess proves that.
I would love it if we could just tell these guys to pound sand, but I’m aware that this will likely cause severe hardship for the original borrowers–yes, they shouldn’t have overextended, but the entrapping lenders bear some of the responsibility here, and I don’t think the penalty of forclosure fits the crime. I’m also aware that these guys have tangled so much of this up with the rest of the economy that it’s impossible to just cut them off without (perhaps; this is where I need expert help) substantially damaging our financial system.
Which brings me to my discussion point: How, exactly, do we fix this mess, bring the “right” people to justice for it, and prevent it from happening again? I mean, the S&L crisis was only 20 years ago, and although criminality in the mortgage mess is hazier than it was then, we seem to be taking the same ride yet again…