[geeks] [rescue] E250 temperatures

[Sheldon T. Hall]

Patrick Giagnocavo writes ...

> 1.  I am sure that the underlying loan documents were available for 
> inspection for prospective buyers, after all, you would end 
> up "owning" the mortgages.

Typically, an investor is buying a "tranch" (a slice) of some huge number of
individual mortages.  Perhaps one-one-thousanth of a pool containing 10,000
mortgages.  That's a "personal sized" investor.  A big pension fund or
something might be buying 1/10 of a bundle of 100,000 mortgages.  You could
read 'em all, and investigate the credit of each of the borrowers, I
suppose, but it's not practical.  The whole debt industry is based on what
are essentially industrial-strength credit ratings, and the honesty and
accuracy of the ratings are what underlies the determinaton of the price.

> 2.  Taking a bundle of 1000 mortgages (say $150K each = $150 
> million), 
> you would only need to check up on about 30 of them, chosen 
> at random, 
> to determine their quality.  That is about 1 or 2 days' work 
> given that 
> you can run credit checks, look up location on Google or using a zip 
> code atlas determine approximate demographics of the area, etc.

Yeah, you could, but the industry doesn't much work that way.  The guys
making the original mortgages are supposed to make sure the mortgages and
the borrowers fit a standard profile, and then those mortgages get sold,
packaged, and traded under that standard.

Two things happened sort of at once: lots and lots of non-standard mortgages
got issued because everyone involved thought housing prices would keep going
up, keeping the lenders safe, and housing prices quit going up because
everyone who wanted to play that game was already in it.  While not exactly
a classic Ponzi scheme or a pyramid game, it was a type of bubble, and all
financial bubbles have certain simularities.  The primary one is that new
people (and thus new money) have to keep entering the game.  One you've run
out of new blood, or someone eats a tulip bulb, the price quits going up,
some people start to sell, and the whole thing crashes.

And, of course, bad financial news makes people pause before spending money,
leading to a recessionary wave effect.  Folks who think they have $500,000
equity in their $1,000,000 house ("Look, Marge, we're rich!") spend a lot
more freely than do the same people in the same house when it's worth half
as much and they have no equity.
 
> Apparently, dropping $150 million or more on a packaged loan series, 
> was less scrutinized than when I am buying $6K worth of rack 
> mount servers.

Often, that is the case.  Sometimes it's worse.

-Shel