The Greed Train Derails

by Peter G. Miller
March 17th, 2008
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It seems since last August when the Fed began lowering short-term rates that every week or two has brought about another crisis in the financial world. The concerns have been about mortgages, but more significantly they have been about mortgage-backed securities and the way they have been packaged, sold, insured and valued.

Is there are any good news to be had on the mortgage front?

Not a whole lot — and the thinking here is that matters will get far-worse as foreclosure levels rise and investors begin to re-value mortgage-backed securities.

That said, in an odd and uncomfortable way dull-and-boring loan programs will survive and do well.

Looking at the various loan programs available in the past few years, it’s clear that conventional, full-doc loans and mortgages backed by FHA and VA insurance are the prime and juicy loans you want in your portfolio, the loans you want backing your mortgage securities.

It also turns out that option ARMs, interest-only loans for the masses, loans that allow massive rate increases with a first re-set; mortgages with harsh prepayment penalties and stated-income loans are exactly what they were said to be when first introduced — toxic junk that would bankrupt both borrowers and lenders.

As I wrote three years ago, “Is it worth originating loans today which may sink lenders tomorrow? A large number of foreclosures won’t look good on anyone’s books, reason enough to tighten ARM loan standards.”

Nothing that is happening today is a surprise. It is instead the inevitable result of greed, stupidity, a gross lack of federal regulation and more greed.

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