THE CREDIT CORNER

The Mortgage Meltdown. Who is Really Responsible?

by

Chris Seymour, President

Country Mortgage, Sedona

Delinquencies of single family mortgages 90 days and longer past due were reported this week to have reached an all time high of 7.5%. How could this happen with mortgage rates within 1% of their historic lows? And who is responsible for this mess?

The homeowner is responsible for accepting the risk of payments way beyond their means and the certainty of higher home prices to facilitate lower future payment options. How did they get that idea? From the mortgage lenders whose menu of flexible and creative programs could qualify just about anyone at the right rate. The projection of higher house values ensured a profitable pipeline of future business. So they’re to blame; except that Wall Street sold them the creative programs to work with and guaranteed to buy these mortgages as soon as they closed. So firms like Merrill Lynch are responsible and they got what was coming to them by taking billions of dollars in losses, right? Not so fast. Their partners, namely the rating agencies and bond insurers made handsome fees in their process. Rating agencies qualified these loans in structured mortgage securities as AAA grade investments. The bond insurers insulated risk by guaranteeing timely interest payments to investors. So it was these guys that created this house of cards. Not entirely. Investors including money center banks, municipalities, life companies and foreign treasuries were begging Wall Street issuers for AAA rated yields anywhere they could get it because treasury and federal agency paper alternatives were priced at ridiculously low returns. So trillions of dollars chased ABSs and CMOs, backed by mortgages, as the deals of the day. Then, the buck must stop here, but no. These trillions of dollars were made available by our Federal Reserve at a borrowing rate as low as .75% to the banking system; a rate way too attractive to pass up. So the increase in our national money supply pumped up values of tangible assets like real estate, metals, commodities, as CPI and PPI reports continued to deny any inflation. And since our economy has been supported primarily by consumption, the consumer found new capacity created by equity appreciation in their real estate. So the Fed must be the cause, inciting us to make investments in hot markets. Or can we take responsibility for our own bad bets? (Didn’t we start here?). The truth of the matter is that all participants in this industry share equally in the cause of the current crisis.

The Credit Corner is written by Chris Seymour, Broker and Owner of Country Mortgage Corp of Sedona since 1992. For more information, he can be reached at 928-204-1777 or at chriscountrymtg@aol.com.