The Looming Threat That Could Initiate the Next Economic Collapse
Continued from previous page
In a pre-MBS world, banks would have had a big incentive to keep people away from mortgages they couldn’t repay or once they got in trouble, to revise loan terms using common sense. But this isn’t possible in the shadowy world we live in: borrowers don’t even now who to talk to in order to get some relief. Unsurprisingly, many struggling borrowers, many of whom had been steered into bad loans, ended up being losing their homes and savings.
Did anyone learn from this past mistake?
Nope. The financial industry is lining up to make the same mistakes all over, again with the acquiescence of regulators, who show no signs of stepping in and stopping them. This time, however, they want to securitize rent rolls, by assembling a pool of rentals. The income stream from these rentals—meaning the combined rent checks of everyone in the pool-- would be packaged into securities, which would be sold onto investors.
Think about what this means. Just as banks got out of the business of administering the mortgages they made, these securitized rental investors would replace conventional landlords. To make these deals profitable, lots and lots of mortgages would have to be combined. But, the investors won’t administer these rentals. Instead, a rental servicer would be responsible for collecting your rent and distributing it to all of the investors.
Now, what will happen when your toilet backs up or there is no heat? Your concerns would be addressed at a call center, perhaps in another country, provided you stay on hold long enough and are eventually switched to the right person.
Most likely, after leaving any number of messages, your rental servicer will schedule an appointment when you have to be at work. Or, will just allow you to get on with it, and sort the problem on your own.
Suppose you decide to hold back rent until the repairs are taken care of. The servicer may report you as delinquent in paying your rent. That may make it harder for you to find a new rental later—or finance the car you need to get to work—because this negative information would be reported to credit agencies.
Rent securitization is also a bad idea for the investor. There is no historical information on investment performance of securitized rent pools. What looks like a good deal on paper for your pension fund could lead to losses even after someone is evicted on your behalf. Do we really want to go down this road? Doesn’t the ongoing mortgage and foreclosure mess give us a good idea of how this movie ends?
4. The wild world of derivatives.
One big misconception spread by shadow banks and their enablers is that these entities performed better in the banking crisis than regulated banks and that they never get too big to fail.
This statement just isn’t true.
Long-Term Capital Management, a shadow bank, was managed by trading rock stars that included two Nobel Prize winners for their work on derivatives. It was rescued in 1998 — four years after it was founded— to protect the regulated banking system when its derivatives bets backfired. Bad bets by AIG Financial Products on unregulated credit default swaps threatened to push regulated firms, such as Goldman Sachs and Deutsche Bank, into bankruptcy in 2008. The federal government stepped in to bail out AIG, to make sure its mistakes didn’t destroy the other firms. At the same time, the feds also ponied up massive cash infusions and tax breaks to bail out America’s biggest banks, and provided guarantees to investors.