by G.W.Lawrence
Greed and haphazardness explains it all. That’s it in a nutshell. Experts throughout the US are pointing the finger at haphazard homebuyers who leaped before they looked and the greedy mortgage professionals who were so busy counting their commissions they forgot who their clients were. You could reverse this if you like. You can say greedy homebuyers who wanted their first home to be a fantasy home and haphazard mortgage professionals who did not take the time to plan the home buying success of their clients. Either way, greed and haphazardness still explains it all, even when it comes to the whole story.
You see the whole story does not stop with the homebuyer and the mortgage professional. As they say in the movies, “follow the money”. Or maybe in this case, follow the money lost. Tracking this will take you straight to the top.
Once a loan is contracted between the mortgage lender and the borrower, it takes on a Standard & Poor’s (S&P) rating and the loan is then defined forevermore by the rating it receives. Ratings go from AAA, (best repayment scenario), low risk with lower but predictable returns, down to DDD (worst repayment scenario), high risk with greater but volatile returns. This rating predicts the potential return on the loan, which is also called a debt. The rating also determines the packaging of the debt into financial products.
Now, the financial product will have an assortment of debt types, of course a large percentage of AAA or BBB and just a small percentage of DDD. These financial products were then sold and traded to investors and financial firms.
Here is where it gets interesting. The rating was incorrect for subprime loans for almost a two-year period that covered 2005 and 2006. Collateral Debt Obligations (CDO) inventories processed these financial products and incorporated them into major hedge funds. Goldman Sachs, Merrill and Lynch, Citigroup, and others managed these hedge funds. They were all unaware of the actual ratings. These subprime debts were gobbled up as if they were AAA or BBB and not like their actual ratings DDD.
One other thing, mortgage products usually make a smaller portion of these financial packages; however, when large banks and management firms saw what they thought was an added profit potential in these new mortgages, they increased the number of mortgages included in their packages.
When these subprime loans began to default and home foreclosures skyrocketed, investors who thought they had invested in solid products began to lose money like crazy. As nature’s way, just as water runs down hill, the finger began to point down hill, blaming only the buyers and mortgage companies.
Recently, investigators are looking into the malpractice of these large firms and banks concerning this current crisis. The incorrect rating of subprime loans had to start somewhere. Where will the finger point now as legal actions are being considered against those who claim to have the greatest lost.
The housing crisis is no one person or groups fault. All are to blame, from the buyer to the Wall Street investors. The party is over and a window is broken. Greed and Haphazardness must leave the premises, so that we can make the proper repairs and discontinue any further tragedies.
Look into The Power Over Money
