In his latest blog one of my colleagues in this online journal makes a great point, adjustable mortgage loans are great values now, since interest rates are falling and these adjustments make the mortgages easier to pay. What’s this you say, you thought these shaky loans were the cause of the financial meltdown last year and the recsession this year?

Back to the drawing board. Yes, the financial mess was rooted in the enormous new source of credit created by “securitized debt.” It grew like a wildfire. The problem, however, was that these investments were bought and sold in closed transactions which provided no transparency and were devoid of most controls. In the absence of transparency, valuation of the assets was difficult, if not impossible, to do accurately.

Those assessing the values of the “mortgage backed” or “collaterilized debt” investments were left to making valuations based on their models. Unfortunately the models were all tied to the value of the collateral, i.e. the property, not the real asset, which was the loan itself.

Please understand, the value of a mortgage does not vary as the price of the collateral property changes. No matter how high or low the value of the property goes, the mortgage retains the same value. Thus I maintained steadily that the valuations were being made with the wrong yardstick.

It is true that the value of mortgages is tied to the repayment prospects. But here those doing the valuations made two fatal errors. First, they assumed that, when mortgage rates were adjusted, they would go up, thus making it impossible for borrowers, who were already stretched to the limit, to continue payments. They also assumed that borrowers would stop paying as they saw the value of their homes fall.

Contrary to their expectations we now see that adjustable loans have become easier to pay. And during all of last year I stated time and time again that the foreclosure rate had not risen dramatically, in fact it never exceeded 3%. Certainly foreclosures did not track plummeting values in houses in close correlation. However, the massive unemployment we now have caused by the financial implosion due to poor valuations of “securitized debt assets,” does correlate directly with increases in foreclosures, as one would expect.

No, shaky mortgages taken out by people too poor to afford their expensive homes were not the problem. In fact, the great majority of mortage foreclosures (as opposed to tax foreclosures) were in investor owned properties, not owner occupied homes. The problem was that no one had a full understanding of the massive “securitized debt” market and how it was functioning. In their blindness analists devalued these invesments way beyond any reasonable amount and in the process damn near destroyed the economy.