Mortgage Crisis Daily

Headlines continue to blame problems on ‘subprime’ borrowers but the excuse is getting old and no longer holds up to close inspection. I suggest to you that many of these borrowers had good credit at one time. To make the U.S. economy look good, and to make lenders, brokers, and investors very wealthy,that wealth had to be created. Appraisals increased, new mortgage products were invented, and interest rates dropped. Homeowners were told of the new wealth they had in their homes, and they took advantage of it. I estimate that phantom wealth at approximately $3 trillion (USD).

At the same time collaterized debt obligations were modified to include credit card debt. Obviously one’s home improvement cardit card might be used to purchase collateralized merchandise. When you use your credit card to buy hard goods such a refrigerators the item can be collateralized. Credit card issuers modified their terms of service to collateralize everything. Thus CDO’s were marketed as safe collateralized investments. In reality it did not work out that way, accounting for the other $3 trillion over time.

Now that investors don’t trust investment vehicles such as CDO’s and mortgage backed securities analysts are saying it is a subprime problem, caused by poor people with less than stellar credit, who cannot pay their bills. I say it is based on the missing $6 trillion in manufactured wealth that really does not exist.

Not too long ago I wrote an article explaining how one could manufacture a $10 million credit card CDO with nothing but high fees, a one-time cost to issue the card, and a very low credit limit primarily used up by the fees. Nothing changed hands but a piece of worthless plastic and a contract that was basically an IOU. Even with a $300 credit limit this fantasy, if sold to enough people, becomes $10 million in created wealth. That becomes the problem, but $6 trillion in manufactured wealth becomes a worldwide crisis that cannot be blamed entirely on people with bad credit.

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This article, Where is the missing $6 trillion?, is just one of our articles from our Mortgage Crisis Daily

The Subprime Mortgage Crisis Before, During, and After

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