60 Minutes did a great story this evening explaining Credit Default Swaps. You can see the video here. Essentially, the story pointed out that "credit swaps" are insurance for mortgage-backed securities. They are not called insurance, because if they were, they would be regulated. One of the biggest problems causing the latest financial disaster is that the companies issuing the credit swaps are defaulting on them, or could default on them in the future.

A great many people made a lot of money designing, issuing, and selling credit swaps. So much so that there are now approximately $63 TRILLION in credit swap obligations outstanding. Compare that to the total deposit accounts for the entire world, which stands at approximately $40 trillion, and you can see that we are out of balance!

At Resolve Legal, we have seen an increasing use of what we call an 80/20 mortgage. In other words, a borrower takes two loans -- one for 80% and a second position mortgage for the remaining 20%. It used to be that until you had 20% equity in your home, you would pay an insurance premium each month for private mortgage insurance. Well, the ever-creative mortgage industry came up with a way to avoid that insurance payment -- one which home buyers were only too eager to adopt as it gave them more cash to make a larger monthly payment. Now, when the mortgage is foreclosed, it is not insured, and rarely does the second position get paid in the foreclosure process. Thus, the borrower remains on the hook to pay that debt.

On both the macro and micro scales, the system has been failing. We will all be paying for that failure for a long time to come.

Labels: consumer, insurance, meltdown, mortgages