Securitization of Mortgages Drives the Foreclosure Wave, Blocks Renegotiation

June 7, 2007 (LPAC)--In a Reuters review, Wall Street figures including the bond trader supposed to have "invented" mortgage-backed securities (MBS) in the 1970s, clearly acknowledged the truth Federal regulators have been dancing around: The massive securitization of mortgages since 2000 is now driving the "foreclosure tsunami," and blocking the renegotiation of defaulted mortgages to save homes. This brutal fact has also been seen in the fight between Bear Stearns investment bank and a group of hedge funds, led by the Paulson fund. The hedge funds have bought masses of the MBS; the investment banks and servicing banks, on the other hand, are now under Congressional pressure to renegotiate mortgages to avert foreclosures.

Banks and mortgage companies made profits multiple times on the massive wave of subprime, "Alt-A," and adjustable-rate and other unconventional mortgages, first by charging higher interest rates to home buyers, and then by packaging and reselling the mortgages as securities. Now the legal covenants of those securities prevent renegotiating the mortgage terms and payments, according to MBS "inventor" Lewis Ranieri, and other mortgage experts interviewed by Reuters. "Once you sell it" [securitize the loan], "the accounting says you can't go back and touch it," a Rice University professor told the news service. The securities holders--hedge funds, private equity, and other kinds of funds--can block renegotiation, which can't even be proposed until the underlying mortgage is in default.

The research firm Housing Predictor, Inc., based on a survey of 100 U.S. metropolitan areas in May, has forecast two million more foreclosures nationally, essentially agreeing with an earlier forecast by the Center for Responsive Lending, of a wave of 2.2 million more foreclosures coming. This would take the 2006-09 foreclosure "tsunami" to 3 million, larger than the one which hit when the U.S. savings and loan bank sector collapsed in the middle 1980s.

Only Federal and state legislative action can halt this wave.