Home Ownership Deception Scheme

There was a great post from Maggie Knowles on LALand this weekend about the housing crisis. Maggie has given me permission to print it here:

The mortgage crisis has never been about home ownership. There are 6 major players in this scheme, the home ownership deception scheme.
1. Brokers, 2. Lenders, 3. Investment Bankers, 4. Rating Agencies - and the ones they lure 5. Investors and 6. Borrowers (you could think of 1-4 as fishermen and 5 and 6 as fish). 1 thru 4 have no skin in the game and they are working for Wall St. and have made off with billions of dollars.

After the high tech boom, the housing market was the next investment vehicle that Wall St. was going to push.

Before 2007, real estate was the best investment in America. How does Wall St. take advantage of that? They package mortgages together and sell them at a higher return. "They can't lose, they're the best investment in the world!" There was a high demand, but there was one problem - there wasn't enough product (borrowers - there were only so many people who had 20% down, high credit ratings, etc.)

Where do you get more product (borrowers)? Start creating products that a wider market can qualify for. So first came the A. sub-prime loans, then came the B. high-rate "strangulation" ARMS (interest rate only goes up, not connected to LIBOR or Prime Rate) where payments will double no matter what happens in the market and principle is never paid down, then came C. a negative amortization product (where principle grows and is never paid off), then came D. Option ARMs, then came E. no doc loans. (I may have missed some data regarding these loan products, but you get the idea.)

The point is, the loan products are defective by definition. When you recognize that these are defective products and this is orchestrated to generate billions of dollars out there for the four players in the middle (1 thru 4 above), then what's the solution?