How did the mortgage crisis come about ?

Some good information on how the U.S. got in to this mortgage mess. Click on the map above for the raw numbers and an analysis by a joint committee of the U.S. Congress.

And to see how we got there, read the following:
Mortgage Market House of Cards

The mortgage market, as we all know, is the heart of the current problem. It is a gigantic carry trade market, and it always has been. Mortgage lenders are borrowed short and lent long, which is the essence of the carry trade. Now this trade has been disrupted because what should have been obvious in 2005: the inability of subprime borrowers to pay off their loans. This has become public knowledge. The mortgage lenders cannot raise the short-term capital necessary for the game to go on as before.

This newly reassessed risk is based on a discovery, namely, that Greenspan's ludicrously loose monetary policies, 2000–2003, have led to a housing bubble crisis. But Bernanke will never admit this in public.

He is now in search of new suppliers of pools of capital who are willing to rush in and bail out the mortgage-lending market. Who wants to be first? Nobody. But the crisis will get much worse if lenders don't enter this market to provide loans for visible deadbeat borrowers. This must be done very soon.

If the deadbeats walk away from their homes, and if new lenders are not found to fund replacement owners, America will experience hundreds of billions of dollars of property equity decline by the end of 2009. He will not say this directly, but this is the problem. Squatters and the weather will take over occupancy.

Who, then, should rush in where angels fear to tread? Local banks, says Bernanke. They did not create the crisis, but they must solve it.

Local banks got out of the mortgage market two decades ago, after the savings & loan debacle took its toll. Government-guaranteed mortgage lenders entered, pooling trillions of dollars of mortgages based on a broad geographical base of loans from around the country. This was done in the name of asset diversification. It also cut costs of local monitoring. The statisticians assessed the risk, and nobody was hired locally to monitor the loans and collect monthly payments. So, local banks took commissions for originating loans locally and then passed the loans on to Fannie Mae and Freddie Mac.

Local banks went into commercial real estate instead. Their banks are now at risk. The Comptroller of the Currency, John Dugan, on January 31 gave a speech to the Florida Bankers Association.

When the commercial real estate market begins to fall in the recession, as it will, local banks will have their hands full. Where will they get the capital to head off foreclosures in the residential estate market?

So, no one is available locally to monitor the empty houses or screen replacement home owners. The cost of monitoring is rising. The number of people locally to do the job has declined.

Bernanke now thinks that local banks are ready, willing, and able to take over their old tasks. But how? No one has been trained to do this for 20 years. The people with these skills have retired. The local banks got cut out of the mortgage market except as loan originators, which economic idiots could do, and did.

Why would any local bank step in now? Not to get rich, surely. Only to keep from getting poorer in a national banking crisis. Here is Bernanke's message: "Heads, you lost; tails, you will lose even more. Step right up! This way to the guillotine!"