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Thursday, December 22, 2011

What Makes A Mortgage Bad?

The recent Securities and Exchange Commission settlement with Freddie Mac and Fannie Mae and lawsuit against six of their top executives has returned attention to the mortgage origination practices which are widely blamed for the housing bubble collapse and subsequent economic recession.

The issue boils down to one basic question: what makes a particular type of mortgage bad?  My answer, put as simply as possible, is that the types of mortgages themselves are not bad; rather, the problem was the total disregard for the risk inherent in a particular mortgage because of the risk assessment, or underwriting decision.  Put differently, the problem came from the horrendous underwriting decisions that banks originating the loans made.  Many of these mortgages never should have been issued in the first place, on the stated terms or any terms.

In coming days and weeks I will explain the complex issues involved in unwinding the mortgage debacle.

Eric Dixon is a New York lawyer experienced in the public disclosure requirements of the securities laws, and with extensive experience investigating mortgage-backed securities, underwriting and real estate valuation processes, and market conditions in the residential housing market in the Northeast.


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