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Together, greed and indifference made the markets inefficient. They allowed huge profits to flow to residential finance, construction, manufacturing and related service companies, abetted by insatiable consumer demand financed with mortgage debt.
Fear did not really enter the picture until spring 2007, when the most-obvious lending errors became apparent. Although their volume was only a fraction of the larger prime- and Alt-A-loan pool, nonprime loans exposed the greed and indifference to risk of even some of the largest financial institutions.
Even the vaunted transparency of public firms that forms a key component of efficient markets was not evident during the nonprime run-up. Several public nonprime lenders declared bankruptcy, and the unraveling of the mortgage-banking conduits’ front end picked up pace.
By summer 2007, broader economic fear began to take hold. Rather than an efficient assessment of risk and reallocation of capital, the credit markets panicked as banks pulled critical credit lines from mortgage lenders across the board.
When August 2007 rolled in, the financial markets had almost seized up as financing was pulled even from business loans. This choked the economy in a way that precluded an efficient correction to the problem in the mortgage-banking industry.
With the unwinding of nonprime loans marked by accelerating defaults and foreclosures, new decelerating forces buffeted the economy, and recessionary fears clouded effective decisionmaking.
Fear actually is creating a situation where the continued unraveling of home loans will create substantial damage to the economy that could take decades to repair.
If more than half of the U.S. population participated — whether directly or indirectly — in the run-up of the mortgage market, it’s possible to argue that taxpayers should participate in fixing an economy that is not capable of acting efficiently.
There is no financial institution large enough to affect the U.S. economy broadly and to break the cycle of the current market’s operation beyond its current boundary of efficiency.
With $2 trillion to $3 trillion in home equity at risk, bailout proponents have argued that quick and rational action was necessary. Acting decisively to provide solvency and adequate oversight may limit the damage to less than $1 trillion (hard costs plus decreased asset value) within another nine to 18 months of economic correction.
Collectively, players in the real estate and banking industries made a series of financial mistakes with open eyes.
Perhaps it is time to learn from our mistakes and act collectively to help push our economy back into the range where it can start operating more efficiently.
Gregory J. Martin is executive vice president of corporate development at Lender Support Systems Inc. (www.lendersupport.com), a 25-year-old mortgage-technology enterprise. Martin has broad experience in corporate management, finance and marketing. He guides Lender Support Systems’ strategic partnership and investment activities, along with serving as interim CFO.
Past roles include working as a mergers-and-acquisitions intermediary, managing director of a Hong Kong company and a Navy pilot. Reach Martin at firstname.lastname@example.org or (858) 268-7100.
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