Banking Crisis Imminent?

Here is an article worth reading…

==> “Mortgage Meltdown” by Sean Olender

I was originally referred to this article by Stephen Jones. My dad sent the link to me, my mom, and my brothers. One brother responded with skepticism for what he perceived as a lack of solid evidence.  He wrote:

Hard to say how much of that’s accurate without doing more research.  I read both the article and a fair amount of the comments on the article and tend to agree with the more skeptical posts about the lack of support in the statements made.  It’s obvious that there were some stupid decisions made in regards to the housing market and the economy in the last several years, but that it’s all been illegal, while not necessarily unlikely, isn’t very well supported in the article.  I haven’t been following the issue however, and certainly don’t know how these foreign investors were lied to by the U.S. banks, since I’m not familiar with how that process works.

It’s an interesting article, but it just seems like the majority of any economic or political articles (including this one) tend more towards sensationalism than a factual report since most people aren’t interested in reading something that sounds like a text book (understandable, but I’d rather have the textbook).

I, on the other hand, was not so skeptical. In fact, I suspect what Olender writes is true. Here is my response:

Basically, the banks sold foreign investors mortgage debt notes. But if a debt note was high risk, the banks lied by saying it was low risk. That’s the gist of it.

Whether it was intentional or not is debatable.

But usually, to determine the truth of these matters, all you have to do is follow the money. Who stood to profit the most? Who stood to lose the most? Answer those questions and you’ll know who is most likely to resort to deception.

Another reason for the run-up in housing prices has been caused by the cozy relationships between mortgage brokers and appraisers. Obviously, a mortgage broker wants to loan money because that’s how he makes money. But he can only lend money when the value of the property supports the amount of the loan. So he needs an appraiser to validate how much the property is worth.

The problem arises when a mortgage broker refers a lot of work to a single appraiser. The appraiser feels indebted and doesn’t want to lose the business. So he might fudge the numbers a little bit to help out the mortgage broker. The broker responds by sending him even more business.

This situation was made worse by the incredible number of people who got into the mortgage brokering business during the boom. They were all desperate for business, so thus more susceptible to violating their own ethics.

Has all this been documented? I don’t know. But it’s mostly common sense. I think the same thing applies to the story in reference. Until we actually see specific cases of high-risk loans being given false low-risk ratings, then we won’t have strong evidence.

But the simple fact that bond investors are considering suing banks for fraud is significant. This is evidence enough that questionable practices have been used to rate and sell mortgage debt.

Consider this paragraph from the article.

“The Goldman report in October suggests that rampant investor demand is to blame for origination fraud – even though these investors were misled by high credit ratings from bond rating agencies being paid billions by the U.S. investment banks, like Goldman, that were selling the bundled mortgages.”

Notice the path of the money.

The bank sells mortgage debt to bond investors who rely on the credit rating provided by the bond agency, which is ultimately paid by the bank!

Can you say “conflict of interest?”

Again, just follow the money and you’ll usually find the truth of the matter.

Two more things worth noting.

Sean Olender is a lawyer in San Mateo county, California. He has probably seen a lot of evidence firsthand.

What’s more, The Baglady has been writing frequently about the deteriorating housing market in San Mateo. She has been publishing statistics every two weeks. You can see her most recent entry here.

Why would I share all this on a blog about debt reduction? Because debt is not just a personal problem. It is also a national problem. I believe we must be aware of what’s happening in the world at large to make better decisions about how we handle debt and money on a personal level.