Mortgage Backed Securities and Real Estate Collapses
A mortgage-backed security is a type of asset-backed security that is secured by a mortgage, or more commonly a collection of sometimes hundreds of mortgages in a portfolio. Hopefully they are doing better due diligence than FANNIE and FREDDIE did when they backed all those bogus portfolios between 2003 – 2005, right before the real estate crash. Hundreds of thousands of purported AAA portfolios were sold and resold and resold again. Come to find out they were only the best loans on the top, toward the bottom of the stack you had what would have been considered F paper in a time before the FANNIE MAE guidelines were relaxed.
Back in the early 90’s when I was a mortgage broker, if you didn’t have 20% down payment, perfect credit and good debt to income ratios- guess what?? You were declined for a mortgage. It was the Clinton administration and the Democratic Congress of 1995 that changed the laws governing FANNIE FREDDIE and GINNIE creating the Community Reinvestment Act which relaxed the lending guidelines in order to encourage more lending in poor neighborhoods. What you wound up with at the height of the housing frenzy was bus drivers buying $700,000 houses with NO credit check, NO down payment and only stated income. These buyers caught up in the exuberance of the moment thought surely they could just flip the house and make some quick cash just like they had seen all their friends do; real estate is a sure thing right??
This was great for Clinton, he got to enjoy the real estate driven economic boom that ensued from the relaxed guidelines but a disaster for successors Bush and Obama who are still bearing the brunt of the crash.
Now the US Government backed FANNIE FREDDIE and GINNIE, since there was really little worry for banks, they might as well make all the mortgages Fannie Mae is willing to buy, and purchase all the guaranteed debt Fannie puts up for sale. But there really were no reality checks stating the obvious, if bus drivers that make $25,000 per year are buying ¾ million dollar houses –chances are pretty good that there are going to be some defaults; multiply that by the hundreds of thousands of below sub prime mortgages that were touted as AAA paper and you get to see the recipe for disaster quite clearly. We the taxpayers again bore the brunt of the bungles of Congress and bailed out. In 2008 alone, the United States government allocated over $900 billion to special loans and rescues related to the US housing bubble, with over half going to Fannie Mae and Freddie Mac as well as the Federal Housing Administration. On December 24, 2009, the Treasury Department made an announcement that it would be providing Fannie Mae and Freddie Mac unlimited financial support for the next three years despite acknowledging losses in excess of $400 billion.
When all that paper started turning bad, the buyers of the portfolios went back and took a second look at what they had bought and that’s when they discovered that - gee whiz - these aren’t really AAA loans at all! They are a bunch of bus drivers!!! Let’s prosecute! Let’s sue!! So in order to cover their tracks the original loan aggregators shredded the documents leaving no trace of the original F paper loan packages (including the original titles and title insurance policies). This is why we have so many people now going to court disputing that their current mortgage holders doesn’t hold clean title. Not a bad deal, getting a free house, for some that bought at the height of the market. Those that bought before all this fiasco can forget it; you can guarantee their bank has title in hand.
As to the rest of the herd caught up in the mess, the banks wound up foreclosing.
Now all of this could have been carefully orchestrated in advance. I have a hard time believing that all the bright minds out there could not have foreseen the obvious. Perhaps this was just a coup on the part of the bankers to snatch up the real estate holdings of the average American. Most of which are rental tenants now- no longer home owners.