When Katrina was front and center in the news, many mortgage companies promised a 90-day moratorium on house payments so that homeowners could catch up. They would have to pay eventually, but they could have a little more time. The 90 days have gone by, and now that New Orleans isn’t on the front page, Phase II begins: pay up or face bad credit reports, escalating penalties and late fees, and eventually foreclosure. It doesn’t matter whether the homeowner can live in the house or not, whether the power is back on or the street is passable, or whether the insurance company has said that they will pay. Time has run out, and the owners must pay or lose.
This might sound crazy. Aren’t lenders putting loads of money at risk when they force into default tens thousands of families who can’t pay a nickel now but may well pay in full later? Not to worry, says the Mortage Bankers of America. Since the 1990s, mortgage lenders have bundled up their mortgage loans and sold them to consortia that diversified their risks by lending all across the country to all sorts of different homeowners. A spokesman explained that if every single mortgage in Louisiana went bust, it would still be less than one-half of one percent of the mortgage loan portfolios–hardly a bump in the road.
So that’s how we’ve worked it out on catastrophic risk. Lenders can diversify and still make a profit even when a huge disaster strikes. Families who lose jobs, who have to flee to high ground, or whose insurance companies won’t pay bear 100 percent of the risk – and, if they cannot pay, lose everything.
Banks have already figured out how to spread their risks. Even so, the government steps in with tax breaks and federal guarantees to help the lenders, and passes new bankruptcy laws to let the lenders squeeze the debtors even harder. In the meantime, homeowners are left wondering if the levees will hold or if anyone else on the block will rebuild.
This is risk analysis turned upside down. The best risk bearers (lenders) get the most protection, while the worst risk bearers (families) get the least. Jacob and Paul, please help out: Where is “government for the people”?
