How Does the Financial Market Really Work?
Or
The Fools March On and we pay for it.
An Everett mortgage originated right here in Everett doesn’t stay here. Wow what a surprise. Here is how it works.
Lets say I have am a mortgage bank. I don’t have my own money so I borrow $1,000,000. I am paying 1.5% on that money. Now I go and originate 4 mortgages each for $250,000.
On each of these mortgages I am charging 5%. You might think that’s the end but really it’s just the start. I sell these mortgages to an Investor. That investor may be another bank, a real person, some kind of institution or right now FHA. Because right now the only one buying these mortgage is the federal government. PS they have said as of next March they will stop buying these mortgages.
But back on track. I made 4 mortgages and now I’ve sold them to FHA. I get my $1,000,000 back and a bit of profit. Let’s say I got $12,500 for each loan. That’s a profit of $50,000. I can do this every single day of the week. Remember these mortgages will have an average life of about 5 years and produce interest for that time. At 5% if each loan produces and stays current FHA will make ($1 Mil X .05% X 5 = $250,000) $250,000 less the $50,000 FHA paid to me.
OK if I am a banker and I have my own money at risk I check to make sure that I am making good mortgage. But if I am lending out your money (tax dollars, bailout bucks) I might be a bit more lax about it.
This is how the market basically works until you get politicians involved. Once you get elected idiots involved they screw everything up. You see they don’t care how the market works all they care about is getting reelected.
So how can Mr. Politician use this to get reelected? This is were it get Machiavellian. If I can change the rules and get more people into homes then I have more people who will vote for me. This is a simplified version but it all boils down to more votes for Mr. Politician. But here’s the problem Mr. Politician can’t keep the rules bankers would use because most of these new home owners will not qualify for an Everett mortgage. So what does Mr. Politician do he lowers the standards. Now when this all blows up what does Mr. Politician do he blames the bankers and gets reelected. I give you Barney Frank and Chris Dodd.
Do not think for one minute that I am absolving Mr. Banker here because he went along for the ride and got rich doing it. Tim Geithner is the Secretary of the Treasury. He is a Wall Street banker. He made deals with these banks that the US taxpayer will be paying for for years.
You my fellow taxpayer will be in debt over this until your grandkids are old.
I have simplified this down. There are parts I have left out because they only obscure the end.
I have left out how Mr. Politician forced the banks to lower their standards under Bill Clinton and Janet Reno. I also want you to know this problem has been in the making for almost 30 years. It starts with the Community Reinvestment Act of 1976 and Jimmy Carter. It builds steam under Clinton. In Bush 2 second term it was recognized that problems were occurring. At least 8 different times Bush administrations officials tried to rein this in. Chris Dodd and Barney Frank railed against any tightening of the rules. You can see this for yourself on Youtube.
http://www.youtube.com/watch?v=_MGT_cSi7Rs
Here is John McCain trying to rein in FANNIE MAE but stopped by Democrats Barney Frank and Nancy Pelosi
http://www.youtube.com/watch?v=63siCHvuGFg
In business if you fail you lose and are out of business. In politics if you fail you get reelected. Go figure.
Jim Johnson
