The Mortgage Problem

About ten years ago the Federal Government changed the rules about banking and insurance and a host of other financial services and who could offer them to consumers. The intention of this was to allow a variety of financial services from a single provider so you could easily bank, and insure and invest all from the same entity.

Here we are ten years later suffering from what always happens when Washington has a good idea.

THE LAW OF UNINTENDED CONSEQUENCES

Washington is the master of not seeing the results of what they do. They have ignored their own complicity in this current crises by blaming both consumers and banks(mortgage holders) without realizing that the biggest problem is the de-regularization of the financial industry.

Now I am a conservative so I have to pray at the alter of less government regulation, but in this case the regulation would have saved both the national government and the nation vast sums of money.

By making it open market to offer mortgages the government in effect turned its back on its own regulatory responsibility simply because it became to vast to regulate. The market became flooded with less than reputable mortgage lenders because the investment community was able to subsidize mortgages as an investment tool. The term special investment vehicle(siv) was invented as a way to package mortgages together as a single investment instrument which could then be sold on the open market as a package. The problem with this is that homeowners don't operate as a single group. Once one of these mortgages that are packaged into an investment SIV is defaulted on the problem effects every other mortgage in that SIV. If a single mortgage is bought and sold on the open market you have a direct line of ownership of the debt and recourse to collect from defaulted homeowners. IF the mortgage is part of a package that is bought and sold incrementally on the open market then it becomes less of a direct line of ownership and more like a shotgun blast with multiple pellets of ownership being spread across the investment spectrum. When one loan defaults, it is defaulted throughout all owners of the SIV. Since the SIV is owned by multiple sources as an investment then nobody really knows who is the actual holder of the debt.

If you are not completely confused by this point then you should probably work for NASA or something because this is the stupidest thing I have ever had to try and wrap my mind around.

Guess what, most of the government doesn't understand this either or they would not be calling for these massive bailouts. Listen if we bailout these people who bought more house than they should because of the low initial payment the problem won't go away. It will just kick the can down the road because eventually these chickens will come home to roost.
I don't want to sound like I have no compassion because I do, but we need to let these mortgages
foreclose. Most of the people who will lose their homes will hurt but as the good Book says, This too shall pass.

If the government wants to help these people then offer them a reduced living voucher to move to a rental property and provide credit management services. Something proactive to move their lives forward. Don't do something stupid and freeze interest rates on mortgages or freeze payments. This will result in not only postponing the problem but it will drive the investment market away from all types of real estate which will further erode consumer confidence as home prices continue to plummet. The market will react better to getting all this problem scraped away no matter how painful.

This post has given me a new idea.
I am going to create a new area called
THE LAW OF UNINTENDED CONSEQUENCES
Watch for it......