coyoteyogi

Why Did the Mortgage Market Go Out of Control?

This is a good article and it goes a long way to explaining many of the 'nuts and bolts' that make up the mortgage business. However, I think the author misses the more fundamental point and it is this point more than even the structure and incentives that will determine the final outcome. This point is that the foundation for any and all financial products are the values of the people who make them. Implicit is the need for people to tell each other the truth. If everyone is lying, and I mean EVERYONE, then no amount of computer modeling or even old fashioned due diligence will reveal the problem. The entire edifice of mortgage backed securities is the belief that people will sweat, struggle and sacrifice to pay that money back for decades to come. That belief is a fantasy. People will make the most rational decision for themselves and their families. For many people this perfectly rational decision will be to walk away. This decision will be independent of their credit score. In fact, over time, a good credit score will become less and less valuable. As more people default and walk away the pool of 'poor' credit risks grows ever larger.
Without the values of rigorous honesty and personal integrity the entire system really does become a house of cards. Too many people want to clip coupons and there are not enough people willing to spend their lives sending in their checks. The necessary resurgence and renaissance of personal values and responsibility is and must be local_ person to person. That implies renewed communities of people where you know your neighbors, employers, bankers and customers. That in itself will guarantee a significant contraction. Plant a garden. Be scrupulously honest.