Monday, August 6, 2007

The Mortgage Mess

The New York Times Explains It All to You

If you pay even the slightest attention to the housing market and the economy, you know the market is on a rollercoaster right now because of the mortgage market shake-up. I wrote a little bit about it last week, but wanted to also present a more concise explanation of how this overly-complicated system works. And, The New York Times presents just this today.

Things are not how you might imagine them to be. It would be easy to think that you borrow money for your home loan from a lender, and you pay that lender back. But, the secondary market for mortgages really muddies the waters and makes it difficult to understand how it really works.

The Times explains reality--

"The process begins with the entity that originates the loan, either a mortgage broker or lender. The loan is assigned to a company that will service it — collecting borrowers’ payments and distributing them to investors. Sometimes the servicer is affiliated with the lender, creating potential conflicts if a loan goes bad."

"A Wall Street firm then pools thousands of loans to be sold to investors who want a steady stream of cash from loan payments. The underwriters separate them into segments based on risk."

"Securitization has made it so complicated that everyone in the process is able to say that they don’t know what’s going on. The effect is, no poor person can afford to litigate this type of matter to bring it to a resolution, and therefore they lose their home."

In other words, the rich get richer and poor get poorer. The entire article is a must read if you want to understand this situation, which affects us all, whether or not you are actively buying or selling. If you would like to discuss the mortgage mess more, feel free to contact me at or 510-547-5970.

*graph courtesy of the NY Times

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