Financial institutions -- banks like B of A and Wells Fargo -- originate mortgages and then sell them off to be sliced and diced up into bonds that individual investors can purchase. This financial innovation has been a boon for providing capital and liquidity to our mortgage markets.
The originating bank, however, stays in the picture to service the loan, collecting and processing the payments. Contractual agreements exist between the bank and the bondholders that this will be done in good faith, according to the terms of the original mortgage.
For a host of reasons, mostly massive government meddling and social engineering, the mortgage market exploded and thus, we've got homeowners who can't make payments.
The House passed bill proposes to bail these folks out by paying banks servicing the mortgages $1000 for each one they re-finance, cutting interest rates and payments. Those who actually own the loans -- the bondholders -- are left out to pasture. And, the bill protects servicing banks from lawsuits to which they would normally be exposed for breaking their contracts.
So taxpayers will subsidize banks to refinance the bad loans they originated but no longer own, homeowners who borrowed beyond their means get bailed out, and investors -- the bondholders -- are left to bear the costs. On top of this, many of these same banks originated second mortgages on these same homes. The second mortgages, which the banks still own, bear even higher interest rates because they are allegedly more risky. Yet, they will be left secure and undisturbed.
Aside from the costs that our society will bear as law and contracts no longer have meaning, Frey rightly points out that it all will just make future mortgage borrowing more expensive. Who will take risks to lend when politicians can change contracts at the drop of a hat?
Welcome to the new capitalism. Where politicians rule, irresponsible behavior is rewarded, and theft is legal.
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