I was watching a report on the mortgage crisis on CNN over the weekend. At one point there was an interview with an elderly woman from California who had refinanced her mortgage through Wells Fargo. As with all subprime mortgages the interest rate escalated very quickly, from about 6% to over 10% in a short period of time. As a result the woman, who had lived in the house for years, is now faced with foreclosure.
If the bank were to consider a refinancing at a lower rate, the woman could continue to make her payments, remain in her home, and the bank would continue to have a paying customer. But rather than pursue this common sense strategy the bank is refusing. Why? In part, because it no longer owns the mortgage but continues to act as the loan servicer. So Wells Fargo says its hands are tied. Since most mortgages are securitized and sold to others, the debt now belongs to other banks (or anyone else) who buys asset backed securities or the more complex derivative products that investment banks like Bear Stearns specialize in.
The fact remains however, that the final purchaser of the debt (the securities that the mortgage loans are attached to) would be willing to reduce their rate of return the mortgage crisis could probably be, in large measure, solved. But that won't happen. Why? According to an investment specialist interviewed by CNN, because they are expecting a return and that's non-negotiable. So in essence the purchaser of these securities are so blinded by greed that they are unwilling to make the common sense decision to accept a lower return. Even if it means their own demise, the destabilization of our financial system and that the economy is sent into a recession.
What we need, is greater regulation of the financial system. Many of these "shadow institutions" are unregulated. This needs to change. More fundamentally, I think we need to rethink how credit (and money) is issued. Clearly leaving this in the hands of private corporations isn't working.