From the burst of the “Housing Bubble” through the “Great Financial Meltdown” through the “Great Recession” and our continuing economic malaise I have consistently rejected the notion that this was all caused by bad mortgages bundled into “toxic” securities.  Rather it was caused by poor analysis from those rating the bonds.  Using normal investor logic they assumed that when home values fell below the balances due on the mortgages the mortgage holders would no longer pay leading to defaults on the mortgages and eventually foreclosures, i.e. the mortgage grantor seizing the property. 

What these analysts forgot was that homes are more than investments, they are more importantly a place to live.  Thus mortgage holders continued to pay on their mortgages even though the home value dropped below the mortgage balance due.  I offered as proof that the foreclosure rate for 2006, 2007 and 2008 remained the same about 2%.  That rate did not rise until 2009 when it doubled to 4% in one year.  The reason, some 8 million Americans lost their jobs in 2009 due to the “Great Recession” generated by fear that mortgage holders would not pay.  In sum we had a “self-fulfilling prophecy.” 

One other rationale was proffered for calling mortgage backed securities “toxic.”  Too many mortgages were “subprime” mortgages which meant they did not have the best interest rate available from the lender since they were viewed to be have a higher risk.  The assumption here was that these mortgages were given to people who were unable to pay them.  I knew this was bogus since I personally sold property using “subprime” mortgages,  The reason, all of my buyers were foreigners who could not get “prime rate” or lowest interest mortgages because they did not live in the properties purchased, in fact they did not even live in the USA.  The subprime mortgage was created to finance property purchase by investors who did not intend living in the home but to rent it out to others.  It was not created to allow property sales to those who would normally not be eligible to buy.  No, home purchases by lower income buyers were covered by FHA and other subsidized loans. 

In spite of my best efforts there remains widespread belief that our economic mess was caused by bad mortgages bundled into “toxic” securities.  However, a new Federal program, HARP now gives further proof that this is a bogus issue,  The HARP program will refinance homes that are “underwater” or homes whose values are less than the mortgages based on them.  In other words the HARP program recognizes that home owners will pay mortgages when the value is less than the balance due on the mortgage because the home is first and foremost a place to live and secondly an investment.   

Always good to have confirmation of your analysis even though it comes too late to prevent an economic Armageddon.