Mortgages underwater
How Miami beachfront property gets thirty-year loans
Let me ask you this. If the world leaders truly believed that the oceans will rise and the world is fucked within 12 years. Would people really be able to get a mortgage for houses near the ocean. Hell would they be able to get a mortgage for longer then 12 years?!?! Fuck no.
On the contrary, writing long mortgages on property you know will be destroyed is perfectly economically rational.
Suppose I am a mortgage banker. I write a 30-year mortgage for a million-dollar property in Miami. I strongly suspect it will be underwater in twenty years, but I have no reason to care.
I don’t care, because I securitize it: I pool a lot of mortgages together and convert them into a purely financial instrument called a mortgage backed security, which is sold in the same sort of exchanges that trade bonds.
This means that I, the banker, collect a bunch of money now, and I am finished with this obligation forever. I can dust my palms off — “Goodbye liability!” — and then off to the next mortgage: I don’t really care if the previous place is on fire or underwater or whatever once I have securitized it.
Oh, I make a few pennies by performing the chore of collecting the mortgage money and sending it to the bond holders — it’s called “servicing the loan”, the jokes write themselves — but if that goes away, well, I still have that big chunk of money I got at the start to wipe away my tears with.
Even when the US government was enforcing the law on Wall Street, back when Reagan and Giuliani gave bankers hard time in jail for technical infractions, the only way I would have gotten caught is if I lied about anything. As long as I was scrupulously honest, which wouldn’t require me to express my opinion on climate change, I would have broken no laws if I wrote a mortgage on a building that I knew would soon be underwater.
And today it’s even more slack. The global financial crisis came and we found out that bankers had been breaking laws and lying left, right and center, and none of them went to jail for a day — thanks, Obama! So I could even just write a pack of lies about the mortgage and there isn’t really much that could happen to me — at the worst I pay some fines, pennies on the dollar.
Where do these mortgage-backed securities go? When the property plops and the mortgage stops, whose money drops?
Many of these mortgage-backed securities, with names like GNMA and FHLMC, are backed by the full faith and credit of the United States government — which means that the taxpayer is on the hook when a mortgage stops paying.
But the owners of these securities take some of the hit — all the hit if they aren’t full-faith-and-credit! — and those owners are mostly pension funds.
Most of pension funds are diversified so no individual failure costs them a huge amount of money, but overall this one costs a million bucks, money out of a hundred million Americans’ taxes and pensions.
And I write a lot of these mortgages, and so do my buddies here in Miami, and stealing from people’s future taxes and pensions a nickel and a dime at a time really adds up after a while.
TL; DR: the mortgage bankers don’t care what happens to the property once they get the mortgage off their books, which generally happens almost immediately.
