Bad Mortgages--Banks Failing....Why?

With banks failing and mortgages tougher to get than ever, we have yet another sign there is no free lunch. But how did this happen? The people that run our banks come from the top of this meritricious society, from the Ivy League, MBA's, attorneys...

It's relatively simple, first the government opens the door by requiring lenders to make so many loans in the "sub-prime" market, to people who normally would never be approved for a mortgage. The lender, who almost never holds the loan, sells the loan to another bank. Eventually, loans are grouped, sub-prime (high risk loans made without "proper" collateral) mixed with higher quality loans, by an investment bank and sold to investors, who pay so much based on the investment ranking, what's known as derivatives. Many of these loan packages were ranked as A quality investments, even though many of the loans in any given package were actually C or D quality investments(typically around 5-10%).

It's true there were few warnings, save for Warren Buffet who has been warning about the risks of derivatives as long as five years ago. And it really isn't rocket science. For most of the last 100 years, you could buy a home only with 20% down, because that was the best way to ensure you could pay your mortgage. Relax these standards, NO money down, and this is what happens. Think about it, your bum neighbor comes to you asking for a loan, will you take his promise alone, or will you make him sign over his car as collateral? The answer is obvious, so why would we do nationally what we wouldn't do next door?

Did our best and brightest, the ivy league grads who largely run the banks know better? Of course they did. During the run up to the bubble, they were getting fabulously rich through bonuses built on selling junk loans. This crises demonstrates the dark side of human nature, we'll do things we know are wrong when "everyone else is doing it." It reminds me of a friend of mine, who during college worked at hotel as a valet parking attendant. Now he's a family man, good job, church goer, respected in his community. Back then he told me recently, he and every last one of his peers who parked cars took around half of all the parking proceeds that were to have gone to the company. Over a couple beers one night, he expressed wonder at this part of his life. He said, "I'm not a thief, I would never steal anything!"...."But that's not true, I enthusiastically stole all that money from my employer!" I think the answer is simple, ethics are often relative to our situation, relative to what our peers are doing.

And its probably unavoidable, human nature as it is, that 60 years from now the same excesses will occur from the same people who should know better. So what's the point of this post, other than wallowing in human misery:)....Maybe those of us who are living through this now will speak up in the future when our leaders suggest that the rules are just sooo old fashioned....(See Website for Mortgage Calculator)