Whether Americans Like it or not Foreclosures Have Become Interwoven Into their Lives
Whether Americans like it or not foreclosures have become interwoven into their lives – part and parcel of the housing sector. The slim ray of hope is RealtyTrac reported that last February the foreclosure rate across the country increased by 6% – the lowest in the last four years. However the borrowers at threat from foreclosures have gone up by an alarming 15%.
The tornado of foreclosures kicked off in the beginning with the sub-prime mortgage holders who began to default en masse as interests shot up. But the next surge of foreclosures is largely due to the general weak condition of the economy with a staggering number of unemployed. The latest wave of foreclosures is coming from those with good credit records who had taken out conventional mortgages.
How and why did the mess start?
American Life focused on an investigation that was carried on for seven months digging into the activities of Magnetar – a hedge fund. It was carried on by Alex Blumberg of Planet Money and Jake Bernstein together with Jesse Eisinger of ProPublica. It is alleged that the head of Magnetar Alec Litowitz and David Synderman made use of dollars given by investors to create CDO’s (collateralized debt obligations). Mortgage bonds funded it. The firm then added credit-default-swaps – a kind of insurance in case the CDO failed. These credit default swaps was the creation of Phil Gramm – a former senator from Texas.
As the story unfolds it seems that the legal can be more alarming than the illegal. Mega bankers like UBS, Merrill Lynch and Citigroup were pushed into including the riskiest kind of mortgage bonds into their CDOs. In other word Magnetar introduced a peculiar money generating machine. It collected fees for putting together these CDOs. It also earned from the mortgage repayments. When ultimately the CDO balloon burst Megnetar made collections on the credit default swaps. All this was absolutely legal.
It is not mandated that hedge funds have to disclose anything. It seems Magnetar finalized deals on 25 or 30 CDOs. All except one have collapsed. It is calculated that the hapless investors lost nearly $40 billion while the executives of Magnetar scooped up millions in their pockets. Chiding Magnetar Yves Smith who has penned Econned said, “If the world had been spared their cunning, the insanity of 2006-2007 would have been less extreme and the unwinding milder.”Similar hedge funds poured cash into the real estate markets that has upset the balance. It will take years to right the wrongs.
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