Opinion of the court, delivered by David Lamb, signed by William Leich
If you have ever been to an airport, contracted a computer virus, or taken a look at the Social Security system, you know that security often isn’t secure. And even though Wall Street bankers call subprime mortgages “securitized,” they know that the difference between “securitization” and securitization is a matter of bears and bulls—and not the type found in the zoo.
The subprime mortgage crisis that became the financial crisis that became the recession that became the Great Recession wasn’t a consequence of market failure or misguided risk-taking. Rather it was the result of individuals—bankers and homeowners—behaving like individuals at the expense of the broader economy: exploiting bankruptcy laws that mitigated their own risk, not by removing it, but by imposing it on third-parties.
Subprime mortgages are called “secure” because their loan value is designed not to exceed the value of the property. This means that if a homeowner becomes delinquent on a mortgage, the lending party can foreclose on the home and recover the loan’s entire value. As long as real estate prices are static, banks don’t carry significant risk writing mortgages without down payments.
The problem is that this system depends on home values not falling below mortgage values. When they do—when delinquent borrowers owe more than their houses were worth—creditors can be stuck with a deficit: their collateral—the house—is worth less than their credit—the mortgage—which means foreclosure doesn’t bring all of their money back.
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