Who Gets Stuck With The Bad Mortgages?

Lori Ann LaRocco over at NetNet, John Carney’s new CNBC venture, has a good interview with Andy Sandler, one of the Wall Street lawyers very much in the center of the mortgage and put-back fiasco.

Here is one piece that caught my eye:

We’re seeing Fannie and Freddie put-back some of these loans because of that. Is there a tsunami of put-backs forming?

AS: We could have a tsunami. The loan put-back issue is a mirror to what we are seeing with the foreclosure issue right now. Loans are sold based on reps and warranties. Sometimes there are technical difficulties in these reps and warranties. Sometimes there are substantive deficiencies.

Now these technical deficiencies are being used simply to redistribute the losses on these loans. And there is going to be significant litigation on this for a long period of time. For Fannie and Freddie specifically, these are disputes with their business partners. But this is not the market working it.

Fannie and Freddie are under enormous pressure from their government minders to do these put-backs. So in some sense, its the government seeking to recover from their support of Fannie and Freddie. This put-back issue really needs to be looked at in that specific light.

There is a lot of blame to go around on these loans. Fannie and Freddie and other secondary mortgage players knew what they were buying and the risks associated with it. Everyone in the chain was counting on two things: that interest rates would not go up, and that property values would not go down. Everyone gambled but lost.

This neatly sums up for me the sliminess of this whole episode. Everybody was playing the same game and now that it’s come a cropper they’re engaged in a contest to see who gets stuck with the booby prize. This is all about seeing whose lawyers can stick the majority of losses with another party. It’s a zero sum undertaking that adds nothing to the economy. That some of our biggest financial firms as well as the federal government choose to pursue this course rather than accepting their failures and moving on positively explains much about the current state of our economy.

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