Zombie Mortgages Are Causing People To Lose Their Homes
Private equity continues to prove it’s a menace to society
I’ve been pretty dismayed by all the ways that private equity investors use their deep knowledge of the financial and legal systems to screw over regular people. Zombie mortgages has been one of the worst examples that I’ve seen so far. Here’s the background:
Back before the 2008 financial crisis, housing prices as well as the mortgage bond market were on fire — prices kept going up, up, and more up. Thus, pretty much all the big banks’ risk models said that real estate could never substantially decline and that a 2 sigma drawdown would be something minuscule like -5% (for comparison the same 2 sigma drawdown for stocks was something like -30%). When the risk of an asset is low, you’re allowed to allocate a ton of money to it.
Or if you’re a lender, you’re allowed to lend a ton of money as long as the loan is backed by that asset as collateral. So lend they did. Mortgage bonds and derivative securities backed my mortgage bonds were super hot. And what happens when a ton of credit enters an asset market — prices keep going up.
This of course made lenders even more eager to lend and lend fast. One thing that was a blocker to accelerating the pace of lending was the fact that…
