Mortgage Broker Turned Investment Advisor John Downs On Why Big Banks Might Just Fail

Mortgage broker turned investment advisor John Downs just wrote a good piece on why big banks are headed for more mortgage trouble. It’s good because of his insider take: he was a small mortgage lender during the boom and was squeezed out as big banks were bailed out. Excerpts below summarize and here’s full story is on his site and on Business Insider.

…During the housing bubble, trillions of dollars of these [mortgage backed] securities were churned out. When banks found themselves with loans that did not conform to minimum requirements for securitization – rules meant to protect MBS investors from the risk of widespread defaults – their response was to sprinkle these “subprime” loans into other MBS bundles … If a particularly egregious loan was rejected, it could simply be shuffled into another MBS. In the rare case that the loan was spotted a second time, it was shuffled again … a group of investors has filed suit to force the banks to repurchase their toxic MBS. In response, the banks have publicly stated that servicing problems are “contained” and present no broad systemic risk … As more information concerning the extent of potential bank fraud comes to light, more such lawsuits are a certainty … Which brings us back to the great question of this economic crisis: should we consider these banks “too big to fail”? Or, rather, is it time that they must fail?