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Mortgage Industry Insider Says the Mortgage Mess is Far Far Worse than You Suppose

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Straight Talk on the Mortgage Mess from a Mortgage Industry Insider, as featured at MarketWatch, 12:11:23 PM, December 6th, 2007.

    Even before this mortgage mess started, this insider with 20 years experience in the mortgage industry kept saying that this is going to get real bad. He kept saying this was beyond sub-prime, beyond low FICO scores, beyond Alt-A, and beyond the imagination of most pundits, politicians and the press. When he was asked why somebody from inside the industry would be so emphatically sounding the alarm, he simply replied, “Somebody’s got to warn people.”

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    Since then, Mark Hanson has spent most of his career in the wholesale and correspondent residential arena, primarily on the West Coast. So far he has been pretty much on target as the situation has unfolded.

    His current thoughts, which I urge you to read, follow a short introduction, the first part of which is a synopsis of the New Road To Serfdom article in the May 2006 issue of Harpers, written by Michael Hudson, who saw what was coming:

    "Although home ownership has been a wise choice for many people, this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage – a lifetime spent working to pay off debt on an asset of rapidly dwindling value.

    Most everyone involved in the real estate bubble thus far has made money. But all that is about to change. The bubble will burst . . and when it does, the people who thought they would be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom.

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    Many home owners are spending tomorrow’s capital gain today by taking out home-equity loans. For families whose real wages are stagnant or falling, borrowing against higher property prices seems almost like taking money from a bank account that has earned valuable dividends. New home-equity loans added $200 billion to the US economy in 2004 alone.

    The problem is, home-owner debt is about to surpass the size of America’s entire domestic product. And in growing numbers of housing markets around the country, home prices seem to have reached their peak, and in some places are already in decline.

    Even Alan Greenspan stated home prices had “risen to unsustainable levels,” and would have exceeded the reach of many Americans long ago . . if not for “the dramatic increase in the prevalence of interest-only loans” and “other, more exotic forms of adjustable–rate mortgages that enable marginally qualified borrowers to purchase homes at inflated prices.” If this trend continues, Greenspan said, homeowners and banks alike “could be exposed to significant losses.”

    The second part of this introduction is extracted from the World Socialist Web Site at

    "The New York Times recently reported that Treasury Secretary Hank Paulson’s former firm, Goldman Sachs, began unloading its mortgages and mortgage-backed securities late last year when subprime defaults began to soar. But the top investment bank continued to package and sell securities backed by subprime mortgages, marketing $6 billion worth of these securities in the first nine months of 2007.

    Those who were hustled into taking a subprime adjustable-rate mortgage were assured that they would be able to refinance their loans before the reset rates—generally 30 percent higher—kicked in two or three years later because the market values of their homes would have significantly risen in the interim. But the collapse of the housing market and sharp decline in home prices has left many of these borrowers owing more than their homes are now worth.

    Seeking relief for banks and big investors

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The motivation behind the discussions is the growing alarm on Wall Street and in Washington over the potentially catastrophic financial implications of the accelerating housing slump and related crisis on credit markets. The proposals under discussion are calibrated to avert (at the least possible cost to the banks and big investors) a collapse of major US banks and other financial institutions that could be triggered by spiraling home foreclosures.

    In essence, the scheme is aimed at containing the home foreclosure epidemic sufficiently to shield the major financial institutions from the full consequences of years of rampant speculation, accompanied by accounting manipulations that concealed the immense levels of risk behind the soaring profits and gargantuan salaries reaped by Wall Street executives.

    Were the plan implemented, it would allow holders of mortgage-backed securities to put off marking down their assets.

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)

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