Bad Paper

{The Political Lamp is Lit}

Of all the sound bite terminology being used by the talking head television newsies theses days, the one that sets my teeth on edge is “bad paper”.

What is bad paper? According to what we are being told, it is some of the investment securities that were created by mortgage companies and banks. Bad paper are the part of these investment securities that have “failed”.

Hmmm. Not very clear, eh? Let’s do more than scratch the surface, shall we?

Okay, first we need to understand a bit about just what these investment securities are. Risky loans for properties with inflated prices were floated by banks and mortgage companies, and they tainted the bottom line of these lenders. Even the least risky of these loans were a problem. The majority of insurance companies would not insure them for their full value. This means that if a mortgage failed, the company would lose some money because the insurance would not cover the defaulted loan. So they took all of these risky loans, divided them up into three categories and called them securities, or “paper”. The least risky loans were AAA, the very risky loans were BBB and the highly risky loans were CCC. This is a neat trick. AAA securities are suppose to be the most stable, trustworthy kind of paper. Solid as granite. The trick is that ALL of this paper was built out of risky loans. Yet because they were labeled AAA, insurance companies and others insured them and bought them. However, when the housing market dropped, foreclosure sales stopped making up the difference because the loans had been higher than the houses had really been worth. Crash. Now the insurance companies had to pay out more than they could; the banks and mortgages companies had to sell the houses for less than the original loans and the companies that had bought these securities now had “bad paper”. It was a great sucking downward spiral.

This bad paper is what everyone is saying has caused or nearly caused the failure of many banks and mortgage companies, and has caused the failure or near failure of insurance companies that insured the securities.

It was not the bad paper. It was the greed that lead to the creation of risky securities based on risky loans made on overpriced houses. If these securities had not been created we would not be in this mess. If the risky loans had not been made we would not be in this mess. If the housing market had not had inflated prices we would not be in this mess.

But still. What is bad paper?

Bad paper is crushed families. At the very bottom of this pile of financial shenanigans are people, families with children and medical bills and hopes and dreams. Yes, some of the loans were to speculators and I have very little sympathy for them. But the majority of the loans that are the basis for this bad paper were let to people with hope for the American dream. Now they are in worse shape than they would have been in if they had never aspired for home ownership. Some pundits blame these home buyers for defaulting on their mortgages. I blame the lenders for greedily making loans that they knew would be defaulted on as soon as the adjustable rates moved upwards. Not every home buyer can be expected to fully understand the financial aspects of this process. I am a smart guy and I didn’t.

So far the bailout has been for the people that created the problem. I would like to see some equity here (no pun intended.)

Banks and mortgage companies that receive bailout money should be required to renegotiate all their loans, well maybe not for a buyer’s second home, starting with adjustable rate mortgages. They should all be moved to a flat rate specified by Congress. This way those those homeowners have a chance of not defaulting. It will turn a lot of future “bad paper” into good paper. Good for the home owner, good for the mortgage company, good for the taxpayer.

Every time I hear “bad paper” on the news, I can not help but think of those families whose lives were destroyed by unconscionable greed.   “Bad paper” is every foreclosure sign, every bank auction, every abandoned property.  “Bad paper” works at McDonald’s and WalMart.  “Bad Paper” stands in lines at the food pantries.  “Bad paper” used to be your neighbor.  “Bad paper” could be your coworker, a fellow church member, the kid at the playground.

And you know what?  It isn’t over.  Soon the same crash will happen with the credit card securities market.  The new “bad paper” will be the people who had to pay the doctor on credit or buy groceries on credit, because they kept paying the mortgage and sacrificed everything else to hold on the the American Dream.  The sick part is these people will likely lose their homes to bankruptcy.

Rant over.

I promise to have some non-depressing topics posted here in the near future.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: