A lot of American homeowners have a mortgage. In this legal agreement, a lender provides funding for the purchase of a parcel of real estate and the borrower, the owner, agrees to pay that money back over a period of time plus interest.
Let’s set aside all the potential variations, adjustable rate mortgages, interest only mortgages, Islamic mortgages, etc. The bottom line is a parcel of real estate bought with a loan.
That mortgage has value. On day one, it’s value is the amount loaned plus all the interest that would be paid over the term of the loan. You would think you could sell that loan, that there would be a market for it.
Fast forward. Because of a variety of conditions at level of the borrower, the real estate which the mortgage is based upon has either lost value or is discovered to not be as valuable as when the loan was made. Picture mortgage brokers, bankers, appraisers and homeowners going to jail in some cases.
The business now holding this mortgage does not know how to value it. It is apparent that the original value is wrong.
But the mortgage still has a value. It is still secured by a parcel of real estate that has a to-be determined value.
The business holding the mortgage hopes, really hopes, that the actual value is close to the original value. The market for mortgages is far less certain.
The business wants to sell that mortgage, to recover as much of its original investment as possible. The market wants to buy that mortgage at as low a price as possible, to ensure that if there is a profit to be made, it can be.
No one sells or buys. The business holding the mortgage proclaims that there is no market. The government panics, spurred on by the phone calls from all the mortgage holder people who contribute to campaigns.
There is a market. The businesses holding the mortgages do not like the market because if they sell in that market they will not recover most of their original investment. That is not lack of market.
In fact, the businesses holding mortgages are wagering that a government bailout will pay more for these mortgages than the market. So much so that they are refusing to participate in an existing market.
I have $5.00 in my wallet. I will pay $5.00 for any $1,000,000 portfolio of American mortgages held by any entity. There, I have created a market for mortgages.
Let’s examine value a little more. The real value of a mortgage is the potential sale price of the real estate that secures the mortgage plus the value of payments yet to be received. A mortgage always has some value.
In a portfolio of 100 mortgages, there are 100 parcels of land as security. If any of the 100 borrowers is making payments, that adds value to the portfolio. That value is greater than zero but less than the original amount loaned.
It is up to buyers and sellers to agree on the value, or sales price, of that portfolio. It may be 5 cents on the dollar. It may be 30 cents on the dollar. It will be a discounted price but a price can be determined.
Unless sellers refuse to sell. Unless sellers believe that a third party, the Federal Government, will pay them more than the market will.
There is a market for mortgages. The sellers do not want to sell at market prices. The Federal Government has been convinced to intervene by these sellers.
We, American taxpayers, are being fed a steaming pile of bull by elected officials bought and paid for by the mortgage industry. This crisis was manufactured solely to ensure that mortgage holders receive a higher price for mortgages than a reasonable buyer would pay.
It think it’s time to fire Congress.