Five Questions About the Mortgage Crisis

That's not an idle question. The financial institutions seem quite able to find the initial borrowers when it comes time to collect or foreclose. Surely the banks or servicers have the documentation from the initial loan, noting the name and address of the mortgage broker who hustled around small-town America talking families into these great adjustable-rate deals, collecting $1,000 per deal.

Surely, someone has considered tracking them down on their yachts -- and charging them as individuals with fraud.

(To allay the onslaught of complaints from the mortgage industry about this suggestion, let me make it clear that I'm referring only to those jerks who made loans to people who clearly had no income to make the monthly payments once the initial, low rates wore off. Could we get their bosses -- now departing with big severance checks -- indicted as co-conspirators?)

Where Was the PMI?

Another big question: What happened to PMI -- private mortgage insurance? Lenders used to require this dreaded extra payment, typically one-half of one percent of the amount of the loan, to be paid by borrowers who had less than 20% equity.

This insurance was there to protect the lender from default, not to protect the borrower from loss. It was required for loans sold to Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote).

The Web site of the Federal Reserve Bank of San Francisco still posts as an explanation for PMI -- and, interestingly, an endorsement of low down payments:

"PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3% to 5% down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment."

Since PMI was designed to protect the lenders, surely those insurance policies should mitigate the banks' losses on the loans that went bad. Except that most of those loans didn't have PMI.