Mortgage Markets: "A Mutant, 20-Tentacled Octopus of FAIL Squirting Poisonous Ink..."
I tell you, intellectual life is certainly more fun since the invention of weblogging...
Ryan Avent:
Mortgage markets: The tangled web they wove: IF YOU want to give yourself a headache and/or become both very confused and very concerned about the state of the financial world, I recommend you attempt to figure out the developing foreclosure mess. It's like a mutant, 20-tentacled octopus of fail squirting poisonous ink at those trying to pin it down.
Those interested in a relatively detailed account of the issues involved are encouraged to read through Mike Konczal's work on the subject. I'll give a ludicrously short version of the story here.
During the housing boom, there was an explosion in the process of mortgage securitisation.... [M]ortgages... would wind up at banks, who would group pools of mortgages together to be chopped up into securities... payments... were filtered through servicers and out to holders of various mortgage bonds. Each step of the way, a lot of paperwork was involved... as the boom geared up and the pace of buying and securitising became frenetic, this important trail of paperwork frequently fell apart.... This is a problem, because some of those documents become very important when a loan goes into default and a foreclosure is sought.... [M]any of the foreclosures... may have been done improperly, or without appropriate paperwork, or with improperly (or perhaps fraudulently) generated paperwork.
And so a real mess has developed....
All that is bad enough as it is. The situation is unlikely to inspire confidence in potential buyers, whom the housing market desperately needs. Congressional action may be necessary (which is a terrifying phrase to utter these days). And there is a very small but real chance that things could get really ugly...>.
And that's just one side of the problem.
The other side... concerns the mortgage securities.... If some share of the loans that went into a particular security weren't properly handled, then the bank that created it could be forced to repurchase it.... Banks could also be targeted in related lawsuits.... People are now spinning scenarios in which the mess adds up to another systemic risk crisis, complete with weekend crisis interventions and, one presumes, a nice blow to the real economy.
Estimates of what this all will actually mean for the broader American economy range from "nearly nothing" to "the end as we know it"...
