Over the past many months much has been “pressed” on the subject of the “Mortgage Crisis in America”. This conversation will continue for many more months if not years so don’t look for the dialogue to end any time soon. To aid in the process fueling this great dialogue I’ve decided to put pen to paper and start my own commentary so prepare yourself for a 3 Part series on the subject which I’ve blithely titled “Whose Mess is This Really?”
This series will be defined, from the layman’s vantage point, simply by a fundamental discussion of (1.) What is the Mortgage Market, (2.) The Mortgage Industry and Consumer Practice, and (3.) The Resolution .
What the Mortgage Market suggests is simply the mechanism whereby Funds are provided/accumulated for the purchase of residential property evidenced by the Instruments (Mortgages etc.) that are created to evidence their (the Mortgage) existence.
This process, the creation of the “provided/accumulated” funds, occurs in several ways. However, before we go in to that, let us first understand how the process originally started. If you’re a fan of Frank Cappra’s great master piece “It’s A Wonderful Life” then you’ll have a head start on the mortgage market’s infant stage. These entities used to be called Savings & Loan which is exactly what they were. You deposited your savings and the entity used your deposited funds to lend money, typically, to Folks wanting to purchase a home, the loan! They would charge the Borrower a rate of interest higher than what they were paying on your savings account, pay you (the Depositor) a nominal rate of return and hopefully at days end, have a profit based on the “margin” (i.e., the difference between what they pay the Depositor, the source of the funds, and what they collect from the Borrower). Simple, yes? Great concept of course however there exists one critical limitation and that is the restriction on the amount available to Loan is directly related to the amount of money available (from Depositors) and of course, as George Bailey finds out when there’s a run on the “old Building & Loan”, the depositors funds are not available for withdrawal as they are, in effect, in the homes these funds (the Deposits) were used to purchase.
Solution: Along comes alternate funding sources and ultimately the demise of the Savings and Loan concept and the creation of FSB’s (Federal Savings Banks). The alternate funding sources became the Federal Government through the GI Bill, HUD, Fannie Mae, Freddie Mac, FHA etc. , the Federal Reserve who makes funds available to Banks, the Secondary Mortgage Market who in effect provides revolving Lines of Credit to Mortgage Bankers and lastly, the more speculative and largely unregulated instrument(s) known as “derivatives” (which is a security, such as an option or futures contract, whose value depends on the performance of an underlying security). In this application, think of derivatives as nothing more than a “lotto ticket”!
The U.S. Housing Industry is a huge Cash Cow for an impressive list of “feeders”! The Government from the tax revenues generated, Banking/Finance Industry, Building Products/Services Industry, Consumer Products Industry etc. The amount of revenue generated annually from this one segment of the economy is massive and finds its way into virtually every facet of the U.S. Economy which is highly dependent on its health. Using the old Building and Loan model clearly does not provide sufficient “funding” to stimulate growth in this Industry so clearly alternate sources needed to be developed and when/where there’s a need, particularly one as profitable as this one, someone’s bound to fill it or find someone who will!
It has long been established, and abundant evidence exists to authenticate, that Government is clearly not capable of operating efficiently. It is not in its DNA or nature to operate from a foundation of economic integrity or clarity. We, as a people providing consent to be governed, have not demanded that it function in this manner and in fact, we’ve not only permitted it but we’ve been taught to prefer it! The traditional Government programs (mentioned above) have been, in effect, sidelined by the Banking/Finance system having stepped in with a seemingly endless array of vehicles aimed at doing one thing: providing a source of funding, to make money doing it and using some very creative methods to accomplish this task.
I don’t feel it necessary to go in to details about the specific of the market function but it is important to understand the basics. The market, in its simplest form, works like this: (1.) A Lender accumulates a “pool” of funds from which they will lend. This Pool is either funds they have on deposit/reserve or it may come from a “revolving credit line” or “credit source” also known as a “conduit”. (2.) The Lender then disperses these Funds in accordance (theoretically) with “standard lending guidelines” toward the purchase of residential property which is then evidenced by an instrument known as a Mortgage. (3.) The Lender, periodically, “pools” these various Mortgages together and then sells them to investors (sometimes known as the “secondary mortgage market”). The proceeds from these sales are retuned to the Lenders “pool of funds” and the cycle starts all over again.
Stay tuned for Parts II & III! Until then,…stay well, prosperous and Blessed!
Curtis C. Greco, Founder
