Monday, August 18, 2008

The Private Mortgage Industry's Role in the Current Crisis

Jack Guttentag gives us a good synopsis of who is responsible for the mortgage crisis and why and then explains one of the primary drivers of the failures - the move away from PMI or Private Mortgage Insurance.

I for one hated paying PMI and was vocal about it, but only because it was so difficult to get removed. Turns out that PMI worked well, but Wall Street and lenders found ways around it (via piggyback loans - a combination of a 1st and 2nd) and this was one reason we have so many problems. Its a little deeper than that, but the irony is that reasonable lending standards combined with a down payment or a risk premium ala PMI works to keep a healthy mortgage market and to keep bubbles in check IF they are applied......of course they weren't applied.

There are some very good lessons here and a lot of blame to go around. There are also some interesting books out there on the topic.

As an aside - the government has a huge responsibility to monitor the banks and the loans they were underwriting, they failed miserably. Will the government take responsibility? Doubtful - but they will most like bailout there largest political donors - Fannie and Freddie........the little guy will however be stuck in a mortgage that likely 40% higher than the value of his/her home.


Scott Dauenhauer, CFP, MSFP, AIF