Submitted by Brian Hall

The hype of “subprime” mortgages needs to really focus on what brought the housing down to where we are today. For everyone out there that does not have a true grip on the mortgage industry/lending, subprime mortgages made up only 2.7% of all mortgages. Out of the 2.7% of subprime, it started off having a default of 19%. Lets say that all 2.7% defaulted and went into foreclosure, that would not have put us where we are today.

People like to blame this mess on brokers and investors that allowed some good and some bad borrowers into new homes. But lets get to the factual side of what went wrong.

Fact 1: Everyone that has to do with the lending industry mainly the housing were at fault. That includes the following: Realtors, builders, brokers, banks, secondary markets and the borrower.

Fact 2 : This industry is more regulated than any other lending industry out their, both federal and state regulate mortgages.

Fact 3 : What is killing this market is not the programs or borrowers defaulting on their loans, but what is making the borrowers default on their loans.

Fact 4 : In most cases with anyone that took out an ARM product in the past 5 to 7 years is either no value in the home, lack of products and or programs and lack of lenders wanting to take on new loans.

Fact 5 : Investors are killing themselves off by shorting each other and calling in margins to protect themselves agains this down fall. The Feds are helping with this downturn as they kill the value in the dollar to help make the ARM (short term rates) lower for the next wave of ARMs coming due (estimates in the TRILLIONS). While killing the value of the dollar to help millions of ARM holders, this is causing inflation/hyperinflation/stagflation.

Fact 6 : There are 2 main ways for banks and investment firms to make money. Mortgages and fees from trading (many different types of trading as well as IPO’s etc.). If you stop taking in new mortgages (housing is at it’s lowest value, now is the time to take on new purchases and we know that the homes are a great value), and you are not bring in the fees from trading due to all investors worried about liquidity. Then you stop making money and what happens when some of your other investments start demanding money? Bear Stearns is what happens. They took on to much risk and when margins were called and investors started taking money out of hedge funds that held a lot of theses risks (CDO, SIV, CMBS, CMBX, etc.)it created a domino effect and brought them down.

Fact 7 : When a company like Thornburg mortgage is in trouble (they specialize in Alt-A Jumbo loans with very high credit scores, low LTV and large amounts of assets/reserves) only because margins are being called, not due to portfolio of mortgages defaulting, you know what is really happening in this market. All investors are taking care of themselves even if it is hurting their bottom line by doing this.

Fact 8: We need to stop blaming subprime as it was only a small part of what is going on and finding out what really needs to be done to stop this spiral before we all are upside down in our houses. Common sense tells us if we bought a new house 7 years ago, there is no way that in today’s market it should be worth less than 7 years ago. If you use that common sense, you will then understand it really is not the housing that is creating this mess, but the opposite. It’s the banks and investors (secondary markets) that are causing this mess.

Fact 9 : When borrowers with great credit scores start defaulting only because their homes have no value, and they can’t refinance out of their ARMS, is that the brokers fault for giving them that loan 5 years ago? Even if it was a 100% loan, it would have been able to refinance in a normal market where the home received a small 4% increase a year. No value, no loan regardless of the borrower ability to pay.

Let’s stop playing the blame game and fix the problem. How you may ask are we going to do this? Get out of panic mode, assess the situation, create a new plan and hold those responsible for the investments accountable for their actions. I would agree that the normal person will not be able to do this, but any share holder can as well as anyone can contact their elected official and tell them that they need to stop reacting and blaming others and help find the solution.

My solution: 1) Create a new GSE that will only accept purchase with a max CLTV of 90%, construction loans at 90% of appraised value and get rid of any builder incentives.

2) Create a cap on all mortgages of 3% Yield Spread, this includes banks.

3) Cap all Realtors at 5%, we all know that the house is jacket up to include this cost in.

4) Any home that is foreclosed on needs to show actual proof that the investor owns the note (must have original signed note).

5) Place big fines and jail time for fraud (for any body that has to do with mortgages and mortgage back securities). $100,000.00 and mandatory jail time of 5 years would stop most fraud.

6) More regulation on the secondary markets, they are the ones that packaged up the mortgage backed securities and sold them as AAA ratings when they knew they were not.

7) Make any type of CDO, SIV and all the other fraud securities illegal as these are really only created to hide losses from investors.

Cap any executive pay at $10 million a year in total compensation, who really needs more to live on. Should the investors not be rewarded with more returns?

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