Breached Levee’s & Underwater Mortgages

If the housing bust and resulting recession are the equivalent of an economic hurricane (albeit a man-made one), what were the levees designed to hold back the flood waters?

Certainly, the major ones were:

–the role played — or not played — by the credit rating agencies, which blatantly mis-rated trillions in securitized mortgages as “Triple-A” that in fact were junk.

–the Glass-Steagall Act, passed by Congress in the Depression to separate investment and commercial banks, and repealed –at the behest of Wall Street – in 1999.

–SEC rules limiting investing bank leverage that were relaxed (gutted?) in 2003.

–the (erroneous) assumption that there was no “national housing market,” just dozens of “local” ones (the diversity was thought to protect against a simultaneous downturn).

–the belief that the Federal Reserve possessed the tools and discipline to keep monetary policy on an even keel, or, in the event that an asset bubble formed and then popped, it would know how to clean up any resulting mess (Alan Greenspan’s mantra).

–the belief, widely held by lenders, that borrowers with high credit scores — and not much else — would never default.

Clearly, all these “levees” and more were breached.

As is also the case with hurricanes, it’s the low-lying areas that get inundated first. In the housing market, that would be homes purchased by marginal buyers, using dubious loans, with nothing down.

No wonder a mortgage that’s worth more than the underlying home is said to be “under water.”

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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