We're A Long Way From Bedford Falls

- Understanding Today's Mortgage Market

OK, so you're hearing about the so-called sub-prime mortgage crisis and you feel sorry for those people but this won't effect you.. right? Not necessarily.



As Frank Capra taught us the banking and housing industries are closely linked. But could Capra have ever imagined what's happening in today's mortgage market.

December 7, 2007 -- Andrew Jakabovics of the Center for American Progress tells CNN that the Bush Adminstration's plan to freeze interest rates on some adjustable mortgage holders does too little, too late for too few people and won't help the people who need it most.

So you're still wondering how this will effect you. Haven't there always been sub-prime (high-risk) mortgages.

In the following clip PBS McNeil-Lehrer Newshour, Economics Correspondent, Paul Solman (with a little help from George Bailey), provides a clear and easily understandable explanation of the new mechanics of "securitized mortgage debt", and what can go wrong in a down market.

And now you're asking didn't anyone see this coming?

In the following video Andy Plesser of BeetTV interviewed Professor John Vogel of the Tuck School of Business at Dartmouth. Professor Vogel gives his take on the root and implications of the sub-prime crisis. This should make the picture crystal clear.

Let's review.

Over the past 4-5 years, high-risk consumers were offered sub-prime (variable rate loans) in an inflated housing market by mortgage lenders who sold those mortgages to hedge funds and foreign investors. So a high risk consumer whose credit may have merited a $100,000 mortgage was given a $250,000 mortgage to buy a home that may have realistically be worth $175,000 instead of $250,000.

During that same time period the banking industry lobbied the Congress to change the bankruptcy laws, making it harder for persons who were over their head in debt to get relief.

And now consumers' mortgages are adjusting to a higher rate and home values are declining. So a consumer may be facing foreclosure on a $250,000 loan on a home that can only sold for $175,000 by the hedge fund, pension fund, bank or foreign investor that now holds the mortgage.

So to sum things up --

In today's America, Bedford Falls has become Potterville. And there aren't many bells ringing on Wall Street.