Thursday, January 21, 2010
Well Thank You Barney Frank
First the banks are allowed to write a bunch of iffy mortgages (balloon and otherwise), then bundle and sell said mortgages (many overseas), and finally to insure said mortgages via derivatives – which were not, by the way, created for the purpose of covering bad mortgages.
Let’s say insuring a billion dollars in mortgages cost the banks 25 million dollars. Everyone’s happy: the insurance company just made an easy 25 million dollars, while both the bank and the insurance company are counting on all those thousands of homeowners being able to afford the mortgage payments (balloon and otherwise) until the mortgage is paid. Or, if the homeowners can’t afford to pay, the housing market will enable the banks to recoup their losses in the subsequent eviction, foreclosure, and resale.
Many of these homeowners bought “up”, meaning the plan was to be able to afford the home in their earning future … “I really can’t afford this home now, but I can swing it for the time being and in X number of years all will be well and I’ll be living within my means.”
Then you have the current “economic downturn” (e.g., recession … look it up, people!), which pretty much ensures quite a few of those homeowners can't afford their mortgage payments after all … and the banks can’t re-write the mortgages, because they don’t own them … because they bundled said mortgages and sold them away.
Now, remember way back when, during the Bush administration? When President Bush tried to transfer oversight of biggies Fannie Mae and Freddie Mac from Congress and over to some other agency? Remember? And member of the House Financial Services Committee Barney Frank said, “These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”