Another Fine Mess!

I’ve been thinking about the subprime mortgage debacle in the USA and its impact not only there but around the world.

For those who have not heard about this latest financial “scandal” in the US, where have you been hiding??!! To sum up what has happened….in the US, as you may know, a certain portion of mortgage interest is tax deductable (the interest payable on up to $ 1 million of principle) for your primary residence and even for secondary residences. Unlike Canada, this means that there is no incentive to pay off your mortgage as this tax deduction can be quite substantive. In addition, this tax policy incents people to buy bigger and bigger homes. That is just one part of the back-drop. The next part was the unscrupulous mortgage brokers whose incentive structure was based purely on commissions not on the integrity of the mortgage. They peddled subprime mortgages that started at a low interest rate and then a few years later reset at a substantially higher rate to individuals who would not have qualified for a normal mortgage. This was all based on the presumption that housing prices would continue to increase and that the asset value of the property would increase. In many instances, there was little or no down payment required. In other cases, people who wanted to renovate their home or needed money for health care costs took out these subprime mortgages. I have heard these loans called NINJA loans, which stands for "No Income, No Job or Assets"!!

At the same time some of those smart Wall Street types (the same ones who have brought you the Savings & Loans scandal of the late 70’s/early 80’s and the Enron/Worldcom, etc fiasco) dreamed up a way of packaging this portfolio of mortgages and selling them on the market as grade A commercial paper. They basically bundled solid grade mortgages with these NINJA ones into Asset Backed Commercial Paper and solid them as investment vehicles to banks, pension funds, governments, etc. I guess no one looked under the hood and analyzed the precarious nature of some of these “assets”. Where were those guardians of fiscal probity – the credit rating agencies?? What’s the outcome of all this – record high foreclosures in the USA, a drop in the price of housing, a Wall Street investment firm sold at a fire sale price, housing prices dropping in the US and a recession in the US that is threatening not only Canada but other parts of the world as well.

Here is a video on the subprime mess http://www.youtube.com/watch?v=SJ_qK4g6ntM .

I have also added a good PowerPoint presentation that explains this mess.....enjoy

Download the slideshow