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Thursday, September 06, 2007

How home buying turned into the stock market

This is an interesting look at the way the mortgage market changed from a tightly regulated way to ensure homeowners had the income to buy a house to a quick way to make a buck.
In the golden age of American home buying — the years after World War II — savings-and-loan institutions or government agencies supplied returning G.I.’s with fixed 30-year mortgages. Home prices appreciated, steadily but at modest rates, and lending fiascoes were rare...

...The world began to change in the late 1970s, when Salomon Brothers...pioneered the mortgage security...Instead of keeping his mortgages in a drawer, the banker on Main Street could unload his risk by selling them to Salomon. The banker was thus converted from a long-term lender to a mere originator of loans.
The game continued, with non-bank entrants into the mortgage market offering all sorts of products like adjustable-rate mortgages or allowing people much more house than they could afford.
Lenders and borrowers alike knew that such loans were dicey; they were counting on the borrowers to refinance — which, as long as home prices kept rising, was a cinch. Naturally, when prices stopped rising, the music stopped.
So what happens now? Some states are looking to help bail out the unfortunate borrowers who didn't understand how their mortgage was merely a risky investment by a Wall Street hedge fund investor. But how to do so without rewarding the investor, who ought to be left holding the tab for their poor choice.

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