Title of an Economist editorial. The Economist thinks America has too much home owner ship, and that the $26 trillion dollars of US mortgages outstanding are at risk of default. $26 trillion in losses will shake the soundest bank. They admit that real estate prices have perked up. Used to be 25% of mortgages were underwater and now that is down to 10%.
The real problem in the US mortgage market is all the special favors the real estate industry (realtors, home builders, municipal boosters, appliance makers) are getting from long suffering taxpayers. It's pressure from this widespread special interest that caused Uncle to create Fannie Mae and Freddie Mac to run the secondary mortgage market. And FHA to guarantee home mortgages. And the mortgage interest deduction on federal income tax. And federal flood insurance. And a bunch of other expensive things.
A good mortgage is a very sound investment. Good means a borrower who earns enough income to carry the mortgage payments and a property with a market value greater than the amount of the mortgage. Preferably a borrower who is married, which gives him that much more incentive to avoid foreclosure. It's hard to explain to the spouse why the family is out in the street.
A bad mortgage is a default waiting the happen. The borrower doesn't earn enough to make the payments, he isn't married, he is a house flipper. The value of the property is way less than the mortgage. It's a sucker's mortgage with an escalator clause that jacks up the payments after a few months.
Only the officer who originates the loan can tell good from bad. He needs to interview the borrower, he needs to contact the borrower's employer to verify income, he needs to inspect the property to ascertain it's market value. He has to know the real estate market in his area to form a valid estimate of value. He has to be local to do all this. The officer will be deligent in his duties, if and only if, he has some skin in the game, like his bank is going to hold this mortgage to maturity. If the bank plans to dump the mortgage on the secondary mortgage market (Fannie Mae), then the officer doesn't care. In fact, he wants to process as many mortgages as he can to rake in the fees he gets from doing a mortgage. Dump it on Fannie before it defaults and all is well.
A broker on Wall St, or a banker in Germany have no idea how credit worthy any borrower is or what the value of a single family home in Kansas might be. So the secondary mortgage buyers don't really know what they are buying. Which caused Great Depression 2.0 in 2007. The sucker investors wised up to the crud they were being asked to finance and refused to buy any more of it.
The real answer to the problem is to shut down the secondary mortgage market. We could do this with a simple law that declares a mortgage non transferable. The borrower is only obligated to make payments to the guy who originated his mortgage. He can stop payments, and keep his house, if the mortgage is sold to anyone.