This article from today's San Francisco Chronicle is the best overview I've ever seen on the genesis and consequences of the mortgage meltdown. I especially like that it pulls no punches in making clear that the primary goal of the proposed 'freeze' solution is to remove criminal liability from the financiers, not to help homeowners.
MORTGAGE MELTDOWN: Interest rate 'freeze' - the real story is fraud
Bankers pay lip service to families while scurrying to avert suits, prison
IMO this article is a 'must read' for anyone who has any questions about where the mortgage meltdown came from, why it blew up, how profits were made from the near-universal fraud, who is being protected by the proposed solutions, and what the consequences could be. Can you tell that I like it?
The print version also includes this very nice graphic which shows the deal flow of these securities. There is a link to this graphic in the online version too, but it's easy to miss so I wanted to highlight it.
I'd love to just copy this whole article verbatim, since Sean Oleander, its author, lays things out far better than I can. But to keep within fair use I'll just quote three paragraphs:
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.
"Many of them foreigners..." is an interesting aside. I believe this is Oleander's way of noting that overseas institutional investors are far more likely to sue here. Yes, U.S. investors are on the hook the same way, and could sue too, but I'd guess that what he wants to imply here is that the "foreigners" are far less amenable to influence by the Bush administration, thus far more likely to upset the applecart.
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process. And, to be sure, fraud is everywhere.
Oleander then discusses how fraud is everywhere in the process, from individual loan applications and appraisals up to senior investment bank management, and there are plenty of documents floating around that show it. The big gotcha is in this fraud, because it can trigger a forced buyback of the securities at face value, which he says is currently ten times their actual value.
The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.
How far are we away from this catastrophic scenario? According to Oleander, not far at all. His article notes that New York AG Andrew Cuomo is "just inches" away from being ready to file charges against the biggest of the bigs. Deflecting that scenario is the goal of the 'freeze', not helping mortgage holders.
Knowing a bit about this arena I loved the take-no-prisoners clarity of this article, and recommend it highly. Having said that, I'm certainly no expert and would welcome comments on this by the likes of bonddad, Jerome a Paris, and others who have been following this in depth. Also everyone else's comments of course!