Year of the Pigtiger

kylejack explains the mortgage fiasco

Fed was lending to banks at 1% as part of “Hurr economic stimulus” in post 9/11 environment, and also the recession that followed it. This is a ridiculously low rate, so the banks were going crazy and trying to use as much of this cheap money as possible for loans before the Fed raised the rate. As a result, there were mortgage companies that were writing up loans for people with no (or very little) verifiable income, and they were making up income figures for these people. They would explain this in the loan application as the person being self-employed in a cash business, or whatever. The banks were so happy to have more people to loan to that they were not looking into the loans very deeply, they were turning a blind eye to what was going on. The thinking was “well, even if some of these loans go bad, we’re putting out a ton of loans and the others will make up for it.” Basically anybody could get a loan with not much money for down payment.

Complicating matters, there are adjustable-rate mortgages (ARMs). When prime rate is 1%, the payments are very low, but when the prime rate goes up, the payment goes up with it. They were selling these loans to these people with not much verifiable income who would never be able to make the payment once the payment doubled or tripled. ARMs are terrible terrible terrible.

When the prime rate went up, foreclosures started to increase as people couldn’t make the higher payments.

Then some assholes came along and told the banks they had a solution: repackage all these loans as mortgage securities. Like they take 100 mortgages, wrap it all up, and turn it into a bond, and investors on the market can buy it. Then as people pay their mortgages this money is sent out to people that own that security. These securities get rated with regard to how safe they are. The assholes got their asshole buddies at the rating agencies to adjust the ratings, so mortgage securities full of deadbeat mortgages were rated AAA, the best possible rating (I think).

Now here’s where innocent people start getting hit: AAA bonds are considered very low-risk. So now you’ve got low risk mutual funds and state pension plans and AIG-RS (AIG Retirement Services) and Wells Fargo and Washington Mutual and Bear Stearns and Lehman Brothers and all kinds of investors looking for a safe investment buying these AAA securities that are supposed to be really safe but are in fact doomed because its full of people that have no business getting a mortgage. This is basically the part where teachers lost their retirement money. Everyone’s buying them because even though they’re supposedly a really safe investment, the sellers (the assholes) are offering a really high rate of return on them, much higher than typical for mortgage securities.

The foreclosures skyrocket and everyone gets hosed. The mortgage securities are basically trash now. The real problem is that we have no idea how bad things really are, because the foreclosures still have not leveled off. The government is now allowing everyone to sell the loans to the government (by transferring all this trash to Fannie Mae [Fannie Mae now owns 50% of all mortgages in the United States]).

Now on top of that, they want to drop a trillion dollar bailout on all the assholes that made this mess possible. The asshole CEOs get to float off in their yachts with a multi-million dollar severance package at the taxpayer’s expense. This is justified by saying that these entities are “too big to fail” and all kinds of shit. Meanwhile, all the companies that own the media outlets are owned by corporations with a stake in this. GE owns NBC, for example, and GE is heavily damaged in the mortgage mess, so you can expect all the NBC family of channels to carry the “too big to fail” line.

pig tiger