Why Securitized Mortgage Loans Is Both Good And Bad
Securitized mortgage loans have received significant criticism recently given their role in the financial meltdown of the real estate market. There truth is there are both good and bad characteristics contained in these loans.
I financed my way through both college and graduate school. By financed, I of course meant I graduated up to my eyeballs in student loans. In fact, I used to refer to them as my first child since I couldn't possibly afford to have a child while I had to pay for them. At least they didn't cry although I nearly did!
The funny thing about student loans is what happens after they are given to you. I was always amazed that despite having no job whatsoever, I could borrow over $100,000 before everything was said and done. I was even more interested in the fact that the lenders I took loans from were not the ones who I actually seemed to be paying. I was forever getting little letters announcing that my loans were now being processed by XYZ, Inc., a company I had never heard of but to which I should send future payments. This was, of course, because my loans had been sold.
Loans are a financial help to millions, but they are also considered an investment. In fact, they were considered one of the best investments on the market before the housing implosion occurred. Now? Not such a hot investment. Regardless, the process worked like a charm for a long time. Retail lenders would write mortgages with consumers, bundle them up and then sell them as securities on an investment market. Who would buy them? Large institutional investors like Lehman Brothers, state pension funds and so on.
Securitized mortgage loans are bashed now, but they are actually very good for the real estate market and economy in general. How so? They add liquidity to it. When banks sell the loans, they receive cash that they turn around and repeat the process with. This makes the borrowing market flush, which means people can access money to buy homes. Consider what happens without this process by just looking at the current real estate mortgage market. It is dead. There is no liquidity. The only loans being done are those backed by Fannie Mae and other quasi-government agencies.
Securitized mortgages also have a very bad side. It is a story we've heard over and over in the analysis of what happened to the real estate market. Since lenders intend to sell the loans they write, they aren't particularly picky about who they give the loans out to. This leads to a ton of loans being written and sold that have no realistic chance of every being repaid. This both caused the real estate bubble and its ultimate implosion. Unfortunately, it also nearly took down the financial markets as a whole and we now reap the "benefits" in the form of appalling unemployment and growth rates.
Securitized mortgage loans are not the evil tools they are now being described as in the media. They provided positive liquidity to the markets, but a lack of loan origination regulatory oversight turned them into ballistic missiles that punched huge holes in the real estate market and economy overall.
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