President George W. Bush, on December 17, 2007, gave one of the most succinct and clear depictions of the scope of the housing and mortgage crisis, pointing to the underreported role of some of the wealthiest players involved in the schemes. In a speech at Fredericksburg, Va., according to the official White House transcript of his remarks, President Bush said, “And the issue—the housing issue has changed. I can remember the first home I bought in Midland, Texas. I remember going down to the savings and loan and sitting down with the savings and loan officer and negotiating with the savings and loan officer. Well, this day and age you’re going to use mortgages that have been bundled, so the savings and loan doesn’t own the mortgage anymore, or the bank doesn’t loan [sic] the mortgage anymore, the local lending institute doesn’t loan [sic] the mortgage anymore: it’s owned by some international group, perhaps, or it’s been bundled into an asset. And so there’s hardly anybody to negotiate with.”
Here is the key section that caught my attention in what the President said, “...mortgages have been bundled, so the savings and loan doesn’t own the mortgage anymore, or the bank doesn’t loan [sic] the mortgage anymore, the local lending institute doesn’t loan [sic] the mortgage anymore: it’s owned by some international group...”
On the December 19, 2007 edition of my talk show, I said, “President Bush pointed the finger at the international bankers, did you all catch that? Excellent explanation by the President of why the hustling, pyramid scheme of the year is now coming down on us. Again, we got those mortgages so easily, not so that the bank could make money directly from us. No, we got that mortgage so easily so that the bank, the savings and loan, the lending institution, could then go to Wall Street and sell that loan and bundle it if you will.”
What President Bush and I, in different ways, were describing is the little known reason why it was so easy for so many of us to qualify for the purchase of a home, over the last 5 to 10 years. Many people have been puzzled as to why a lending institution would be so willing to give a mortgage to individuals with poor credit, little income, few assets, and bad payment histories.
The answer lies in following the money trail after we qualify to receive the mortgage.
After we get the mortgage, the lender sells that mortgage, along with others, to a larger international, investment or commercial bank, or, to a hedge fund or private equity fund, who then takes these separate mortgages—and the expected payments on them coming from us—and combines them into a bundle, and then uses the promise of the future income stream (the monthly mortgage payments from us) as collateral to take out a large loan (from another institution) of their own to finance something like a corporate merger or the restructuring of a major business.
I am aware of the amount of mortgages bundled together in one asset reaching as high as 4,000. I would not be surprised to learn of even greater amounts. This bundling process is known as securitization.
How does securitization work, again?
In a December 10, 2007 article in CFO magazine entitled, “Saving Banks: How the Mortgage Bailout Strains Accounting Efforts” we read, “In a securitization, a bank or other mortgage lender sells the future proceeds of a mortgage loan to a trust, or special purpose entity (SPE). The trust then pools them with other loans and issues bonds backed by the loan payments.”
This article makes clear that the current effort to contain damage from the subprime mortgage meltdown is stretching accounting safeguards that were put in place after the Enron scandal.
The mortgage crisis became publicly visible through the financial media in 2007 when it was learned that major banks like Bear Stearns, Bank Of America, Citibank and Morgan Stanley owned a dangerously large amount of these SPEs, some of which are also known as Structured Investment Vehicles (SIVs), and that they could no longer find a market to sell them to others. The reason there were no additional buyers for the SIVs/SPEs was because those who had previously been interested in them—including many hedge funds and private equity firms—began to see that the mortgage payments that supported them were not being made on time or at all.
