In order to buy a home, what I have to do is show I have enough income, show I have a secure job, so that the income looks like it will continue, put down a down-payment of x-percent and pay a number of points at the closing. I must pay taxes and insurance and the various other costs of upkeep.
Most often, the bank will sell my loan to some other organization that's in the loan buying business. These loans are pay off well for the companies that buy them if they are well chosen. As insurance against loss, the companies secure their costs against the value of the house in a given market. The house collateralizes the loan. When the homeowner goes belly up, the company is left with the value of the home and property, which it usually sells at some sort of discount to get the loss off its books quickly and so it can take a write-off business loss on its income-tax for that year.
So what I'm asking you, Mike, is exactly where is all this collateral that the buyers were supposed to put down. Near as I can tell, the whole notion is somewhat odd. They put up a down-payment. They pay money to the owner of the mortgage, which builds the equity they have in the house. If they walk away from the house, they will probably loose that, and the investors that bought the home loan will take the loss for the rest, which they will improve somewhat by putting it up for sale at a loss, and then by writing off the loss on the Federal taxes.
Where's the collateral?
And of course they had money to make payments. They had to qualify for the loans. The people who were making the loans at the finance companies were cooking the books and writing up loans that they shouldn't have written up. When my wife and I were qualified for a loan, the bank qualified us to buy a house that was twice what we could afford. We were skeptical enough to doubt them, though they pressed us to go higher, and the market, at that time, looked as though we could have bought in, held it for a year or two, then sold it for twice what we paid. In fact, we could have, but we lived there longer than that and the market was down a bit from the height.
If you were a player, an optimist, a gambler or a fool, you might have taken the plunge without so much as a second thought, and patted yourself on the back about how smart you were. If you'd gotten out in time, in fact, you would have been smart. Most of these poor schlumps got caught when the bubble burst.
But about collateral, I think you've got things wrong.
Maybe there's some financial wizard out there without any particular political drum to beat who might slide in some pure information on the economics of the thing?