Investigation into Big Investment Firms Providing Misleading Information to Credit Rating Agencies Launched
Posted by Paul Francis on Monday, May 17th, 2010 at 3:48pm.Investment Firms selling Mortgage Backed Securities being Investigated
What happens when you have a Giant Pool of Investment Money looking for "Safe" investments with high Credit Agency ratings?
To keep it as simple as possible, Hundreds of Billions of dollars are released and made available to make housing loans available. Demand creates lax lending standards and new exotic home loans. Anybody who can sign a document is given a home loan even if they don't make enough money to pay it back. So called Real Estate Investors go out and make speculative purchases on multiple home purchases even though they will never cash flow on the rental market. New Home builders build away, selling out tracts of subdivisions even before a foundation is poured - Adding to the Supply of Homes. In hot speculative areas such as Las Vegas, out of state investors buy multiple homes that are never even moved into.
Home values artificially rise due to this increased artificial demand and the bubble eventually pops, leaving millions of homeowners owing more then their homes are worth.
The "Giant Pool of Money" done in 2008 helps explain how the trillions of dollars invested into the real estate mortgage market got us to where we are today:
The Giant Pool of Money by NPR
"Clarence Nathan was a man with three part-time jobs who earned about $45,000 a year, and yet a bank loaned him $540,000. The bank never checked his income.
"I wouldn't have loaned me the money, and nobody that I know would have loaned me the money," Nathan said. "I mean, I know guys who are criminals who wouldn't lend me that money, and they'd break your kneecap."
But this kind of lending happened, over and over again since 2003, leading to the mortgage crisis that has disrupted the global economy."
Even eye opening for seasoned real estate professionals when you listen to the podcast that is linked in the above article.
The key to this report is how all of this money was attracted in the first place. Through "Financial Engineering" on computer based risk management programs, ratings for these mortgage backed securities were rated Triple A or "Ultra-Safe" Investments. Mutual and Pension fund managers relying on numbers and not common sense poured billions of dollars of their clients money into purchasing these securities - the same securities backed by overpriced housing.
More then likely, you've heard of all the investigations being launched by the SEC into firms such as Goldman Sachs that were not only selling these mortgage backed securities but also selling the insurance in case these same securities collapsed from homeowners not paying their mortgages. Some savvy Hedge Fund Managers using common sense that homeowners with $45,000 incomes can't afford $540,000 homes, bought these Insurance and made billions.
At issue in the above investigations is the ethics involved of handling both sides (kind of like a sports book handling the betting on both teams playing) and some questionable practices in forming the securities... However, Let's get this straight --- IT IS NOT why the housing market collapsed.
The Housing Market Collapsed because of the Giant Pool of Money made available for home loans. Money poured into Loan Originators because of security ratings that said that investing in these securities was ultra safe and yielded higher returns then other comparable ultra safe investments such as U.S. Treasury Bonds.
So Finally... there is news of an investigation being launched into how these Ultra Safe Ratings were accomplished in the first place:
Wall Street Faces New York Probe on Ratings Data
"Critics have repeatedly suggested that the relationship between Wall Street firms and the credit rating agencies was a key factor contributing to the economic meltdown."
Somebody is finally getting it...
Paul Francis
Prudential Americana Group - Realtors
Las Vegas Real Estate
702.592.3058
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