Mortgage Mess or Mortgage Heist?

Everyone has read the horror stories arising from the subprime mortgage situation currently unfolding in America. Heart tugging pictures grace all forms of media bringing the alleged crisis into our living rooms on a nightly basis. One attuned to current events can only conclude this represents a financial catastrophe for America, right? Opinion pages and financial commentators alike assert subprime mortgages have wreaked havoc on both America's economy as well of that of the rest of the world's financial community. Fifty percent of this is correct.

Each day seems to come with a new disclosure of loss incurred by various and sundry institutional investors around the world. Recent revelations by Societe Generale of a 2.6 billion Euro write down related to U.S. mortgages is typical. The numbers are all over the board, but most experts assert total losses coming from American subprime mortgages exceed $500 billion. Much of these losses were incurred by American entities, however a substantial amount has been absorbed by myriad international investors located everywhere from China to Dubai.

How did these losses happen? During the housing bubble many mortgage lenders opened up the spigot approving mortgage applications which traditionally would have been rejected out of hand. Lenders were able to throw all previous lending standards out the window because of a nefarious new financial machination called a collateralized mortgage obligation (CMO). Toxic loans, some of which were almost guaranteed to default, were sliced and diced ending up as CMOs which was then sold to eager hedge funds, investment banks and sovereign wealth funds around the globe.

Colorful terms were coined by industry insiders like liar loans which required no documentation of income and assets. Neutron loans were those designed to eliminate the human occupants but leave the structure intact. It is a wonder how the financial world was taken aback when delinquencies began to rise. Delinquencies led to defaults then the inevitable foreclosures. Investors who purchased CMOs now were faced with the unhappy prospect of seeing the value of the underlying properties decrease thus rendering many CMOs worthless. Hundreds of billions of dollars were lost by institutions from Riyadh to Rome. However, someone received those lost dollars in the first place.

The largest group benefiting from the subprime malaise was everyone selling their home to a buyer utilizing subprime financing. The prices achieved with the market awash in easy mortgages were irrational, and now that lending standards have tightened this excess valuation has been squeezed out of the market. Those who sold with fortuitous timing pocketed billions in dollars which ended up being underwritten by a slew of international CMO investors. Real estate agents similarly participated in the vast majority of these transactions availing themselves to the largesse of these institutions as well.

Other beneficiaries include flippers who exited the market at the right time, title agents, builders, and the plethora of other occupations in America which are ancillary to the realty world. Of course one can't forget the mortgage brokers who profited handsomely, sometimes too much so. The bottom line is that all these parties who were winners are just everyday Americans. These hundreds of billions of dollars were widely distributed from the mountains to the prairies.

The unavoidable conclusion is that on balance America is the net winner in the equation. One can sarcastically say that China exports tainted drugs and America responds with tainted mortgages. The impact upon Americans suffering through a foreclosure can not be argued. However, it can be said that for America it was more of a mortgage heist as opposed to a mortgage mess.