Saturday, November 20, 2010

Mortgage Backed Insecurity

Patrick Byrne of Deep Capture repeats an interesting rumor. The rumor is that a sizeable portion of the loans in the toxic mortgage-backed-securities bundles that crashed in 2008 were actually fraudulent loans. The "paperwork errors" holding up foreclosures are tiny things like houses that don't exist or mortgages that don't have liens on titles.

Possibly some of the bad loans aren't just loans made to people who can't repay, but were fraudulent loans from the start.

The convolutions of mortgage backed securities, CDOs and credit default swaps make my eyes curl up in their sockets.

However, this much I know.

These bizarre derivatives all came from the insurance industry.

The idea behind a mortgage backed security is that centralized banks can manage risk by bundling large number of mortgages into packages that are then traded on the market.

Freddie Mac and Fannie Mae are GSEs (Government Sponsored Enterprises) that bundled, insured and served as an exchange.

The exchanges created a convoluted complex of derivatives such as CDOs and credit default swaps to facilitate the trade of the securities and promised the ability manage risk.

The exchange system for mortgages failed miserably.

I repeat that. The exchange system for mortgages failed.

The exchange system for mortgages failed.

The exchange system for mortgages failed.

The exchange system for mortgages failed.

The heart of ObamaCare, and other current approaches to health care reform replicate the failed centralized exchange system of the mortgage industry.

The system where traders sit in towers and speculate on the risks of others will simply replicate the failed mortgage system. It will be rife with fraud while those needing care will be spun off onto the public coffers.

The better approach to health care reform is to march in the opposite direction. Rather than created convoluted group pools in which the elite control health care, we should develop a system where people self-funded their care (with supplemental grants and loans).

Hmmm, I wonder if anyone has come up with such a thing.

I've watched the news, read the papers, hit the tea party web sites.

I haven't found any.

Hmmm. If only some would work on such a system, it would be great.


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