Mortgages

Now that the 2008 mortgage crisis is behind us, we can review what happened with clearer eyes. The mortgage business is mathematically predictable. You can evaluate the risk of offering a mortgage by looking at the potential borrowers credit history, their income and how long they have worked at their current job and the down payment. Follow that up with rules like how much of their income would be used for the mortgage payment and come up with a reasonable risk/return factor. This is how mortgage banks operated successfully for many years. This led to the hiring of math people to expand on this risk/return business. They decided that mortgages could be put into groups depending on the risk/return factor and the risk of the whole group could be determined. The next was to get the credit rating companies involved to oversee how the risk was determined. Once this was established this group could be sold to investors who were aware of the risk. Once a rating was issued then the buyers would know the risk/return. So far so good. The demand for these packs of mortgages called tranches grew rapidly because at the time CD's were paying one percent and these tranches paid 5% or higher depending on risk. Since they had the approval of the rating companies they could be sold to large investors like pension plans and the race was on. Not only was everyone making a good return but they were providing the American dream of home ownership. The push for more mortgages went to the extremes and people who should never have qualified for a loan were getting loans and it was only a matter of time until the whole thing came crashing down. Even the rating companies were corrupted in their zeal to get more business. Then the company that protected the rating companies got involved as everyone at ever step of the way was getting fees. Greed overcame common sense. In a free market economy it is the responsibility of the government to set some basic rules and more importantly to clamp down on fraud. The SEC was mesmerized by these new investments and fell asleep at the switch. There was failure all around.