Kenneth R. Szulczyk
$100,000 home at 7% interest rate, as a 30-year mortgage, then their monthly payment equals
$665 per month. This payment does not include property taxes, homeowner’s insurance, and
other fees. However, the homeowner pays a total of $139,509 of interest to the investors’ fund
over the life of the loan.
Banks persuaded homeowners to accept adjustable-rate mortgages (ARMs). Thus, a
mortgage payment changes as the interest rate changes. At the beginning, homeowners paid low
mortgage payments, but payments would explode in size as interest rates reset to higher levels.
Using the same example with a $100,000 mortgage with no principal paid, and the interest rate
climbs to 10%, then the homeowner’s monthly payment climbs to $878 per month, increasing
by $213. Thus, they pay a total interest of $215,925 to the investor fund. With home prices in
California averaging $500,000, these numbers become extreme. Some of the largest players in
securitization included Countrywide Financial, Lehman Brothers, and Wells Fargo.
Investment banks profited from the U.S. housing market, contributing to the housing
bubble. Investment banks packaged the bonds from mortgage asset-backed securitized into
Collateralized Debt Obligations (CDOs). They used re-securitization, where the investment
banks took securitized bonds and placed them into a fund, and issued new securities that they
sold to investors. The bankers created CDOs with tranches to offer different returns and risk
levels to investors. Then the investment bankers sold CDOs to investors around the world,
avoiding U.S. regulations. Consequently, the investment banks earned fees from the fund’s
setup and from the fund’s management.
Credit-rating agencies, such as Standard & Poor, and Moody’s conspired with the
investment banks. Credit agencies always rated CDOs with an AAA credit rating, even though
some CDO’s funds contained subprime mortgages. Credit-rating agencies were either
incompetent or perpetuating fraud. Many investors and pension fund managers only invest in
AAA rated securities. Without the AAA rating, the investment bankers could not sell the CDOs.
For example, many state governments require pension fund managers to invest in AAA rated
investments. Thus, the Wall Street Bankers sold their CDOs to pension funds for police,
teachers, and government workers. Furthermore, the CDOs were not transparent, and many
investors did not understand how they worked. The AAA credit rating became vital for bankers
to sell the CDOs.
A company can use a collateralized debt obligation to enhance their financial statements
artificially. For example, a company could package their debt into CDOs. Subsequently, they
became investors and purchased the bonds to this CDO fund, converting liabilities into assets.
Financial analysts do not know how many companies used CDOs to improve their financial
statements. The CDO market ranged from $0.5 trillion to $2 trillion in 2006.
Mortgage asset-backed securities and collateralized debt obligations attracted large sums of
money to U.S. housing market, causing the rapid appreciation of housing prices. Commercial
banks kept lowering their lending standards to grant more people mortgages. Real estate agents
in Houston repeated a joke – if you have a heartbeat and paycheck stub in your pocket, then a
bank would grant you a mortgage loan. Subsequently, the 2007 Great Recession struck the U.S.
economy. Unemployment rate soared to 10%, and households, especially the subprime market,
began defaulting on their mortgages in record numbers. Housing construction industry had