I'm Shocked, Shocked that the Mortgage Industry is Imploding!

The liberals want to unilaterally bust selected mortagage contracts and freeze the teaser rates for 5 to 7 years. Leading Democrats are berating the loan company "predators". Republicans are trying to get the mortgage industry to "voluntarily" take similar actions. Homeowners, and I use the term loosely, who got into houses without documentation and without equity, are walking away from those houses. They were renters 12-18 months ago and they will be renters again.

So as defaults rise, many are asking, "How did this happen?" The only explanation that those on the left will offer is that predatory lenders tricked borrowers with poor credit to sign up for home loans that they could not afford to pay back. What other explanation could there be?

Well, let's see. The development and culmination of the sub-prime mess was pretty easy to see coming for those close to the industry:

1. Interest rates were so low for so long that anyone with decent credit who wanted to buy a home or refinance their home did.
2. Historically low interest rates fueled a boom in real estate investment.
3. Both #1 and #2 drove a higher than normal volume of mortgages. This higher volume provided substantial business to the traditional bank lenders. But is also spurred the growth of non-bank lenders who needed a greater and greater volume of loans to grow, or even maintain at a zero growth rate, their businesses.
4. As interest rates began to creep up once again the only way to sustain this expanded mortgage industry was to find a source of new loans. Loans originating from real estate investors slowed. As described in #1, the surge in loans from refinancing, or getting into a home via a prime loan, was over. The only source of new loans left were subprime.
5. These loans were packaged up and sold to greedy investors who were blinded by the yields without ever really understanding what they were buying in some of the lower rated tranches.

So it was not predatory practices that drove the sub-prime industry. It was desperation. Desperation to sustain an industry that was overextended. Most of the higher than usual defaults and foreclosures are from loans that were made in late 2005 and 2006. During this time, desparate to originate loans at any cost, many lenders offered deals that could never turn out well. In doing so, they sowed the seeds of their own destruction.

Many of the people who are now saying they don't know how this could have happened remind me of Captain Renault, the character played by Claude Rains in Casablanca. Captain Renault disenginuously declares, "I a shocked, shocked that there is gambling going on here!" Then he pockets his winnings.

Of course everyone knew there was gambling at Rick's, just as it was obvious that the mortgage industry would impode. The year's best performing hedge funds saw it coming and made giant money shorting the industry.