Investment funds are purchasing billions of dollars in home loans, and refinancing them through the Federal Housing Administration (FHA), which results in the lowering of the loans’ original value. Next, the reduced loans are packaged together and sold to investors. Homeowners naturally think they’ve received a gift as a result of seeing their mortgages lowered, but what they don’t realize is that as taxpayers, they have also assumed the risk if anything goes wrong with Wall Street’s reselling of the loans. If FHA is unable to back all the refinanced loans during another economic crisis, another bailout could be in order.

 

“From the borrower’s point of view, landing in a hedge fund or private equity fund that’s willing to write down principal is a gift,” Howard Glaser, a financial industry consultant who used to work for the Department of Housing and Urban Development, told The New York Times. But he added: “From the systemic point of view, there is something disturbing about investors that had substantial short-term profit in backing toxic loans now swooping down to make another profit on cleaning up that mess.”

-Noel Brinkerhoff

 

Wall St. Finds Profits Again, Now by Reducing Mortgages (by Louise Story, New York Times)