Explaining why we have a mortgage problem

It's been fascinating watching this make its way about the blogosphere. The video was posted on Monday the 15th; I had it on Monday the 22nd, a full week later. Marc picked it up the following Friday, Paul managed to post it the following Wednesday, and then you get there on the Thursday, a good two and a half weeks after it first hit the web. What ever happend to the idea that memes spread across the internet in hours, not days?

"What ever happend to the idea that memes spread across the internet in hours, not days?"

This isn't a Britney Spears video. It's about the boring and overemphasized "mortgage crisis".

Really amusing but they don't say anything about the poor, hardworking black man from Richmond, CA, who was duped into making a purchase he could not afford and is now suffering the consequences.

Its too bad they had to stoop to a racial stereotype to make an easy point. The reality is we are all guilty of being greedy bastards.

Joe Sixpack wants a house he can't afford. His greed and envy of his neighbor fills his mind. He turns on the radio and hears a mortgage broker's pitch.

Joseph Winecooler sells mortgages, he wants a bonus. He fudges on Joe Sixpacks mortgage docs to allow him to qualify for a subprime mortgage with a super low upfront interest rate. The floating interest rate is low because its March 2004, the US has been through a recession, two wars, and 9/11 and the Fed has cut interest rates to a 50 year low to keep the economy afloat. For the first 3 years the floating rate on this mortgage is fixed. There are other penalties and terms on the back end of this mortgage which Joe Sixpack sort of gets but he figures he can always refinance later. Joseph Winecooler calls his buddy Jerry Merlot, an appraiser, to value Joe's new home. He knows that to keep getting Joe's business he needs to be generous, and setting its value at 110% of actual really isn't too much of a stretch or lie for $500 and more business tomorrow. So Joe gets his home with fudged income, fudged appraisal, and a complex floating rate mortgage in the form of a fixed to floating capped derivative with various early payment penalties.

The Mortgage company sells this fudgy loan to Wall Street. Its not really outrageous - if the economy keeps growing, interest rates stay low, and home prices keep appreciating - even modestly. The Mortgage Company wants to sell next month's loans too. And if they get these sold maybe they'll try a little harder next month, by being a little more fudgier, to make more money.

Wall Street buys these loans and turns them into financial securities. Its complex but here's the 101 - 1) by bundling this mortgage with say 499 others, the total pool becomes more about the average of all the loans - good, fudged, fraudulent. These 500 $200,000 mortgage are now a $10 million pool of mortgages. 2) This pool is either sold as is in the form of a security or it can get further engineered. The pool can be cut up into pieces that divide principal payments from Interest, this year's payments from the payments due in 10 years, or even the tangible from the intangible - say the interest payments in the 10th year from only the last 100 mortgages if the first 400 have not yet refinanced or paid off. These securities become traunches of a CMO.

A professor at the local college he's a geniuses. Everyone says so. They have never run real money in his life and his Econ PhD dissertation in 1970 was about Centrally Planned Industrial Complexes in the Soviet Republic of Uzbekistan. But he has gray hair now and looks wise, and he's not even a Marxist anymore - well not completely. He convinces the Regents that he can earn an extra 2% on the college's $100 million portfolio, which will allow the college to build its new alumni center and that will allow the college to build its endowment. The regents will be praised for their astuteness, the College President will get a big raise or maybe a gig at the University. Its pride, hubris, greed here too and the College loads up on complex CMOs. The Wall Street firm is happy to sell to institutional investors because their liability is far lower and they make profits and meet this year's bonuses.

So who's guilty? Everyone. That's how this happens.