Very good, but why don't we hear anything regarding how Congress reduced the value of mortgage assets when it passed the Mortgage Forgiveness Debt Relief Act in 2007.

Prior to the Act, unpaid mortgage debt was viewed as “phantom income” and the former homeowner paid income tax on unpaid mortgage debt. This tax created a cost to the homeowner for defaulting. The Act removed that cost and gave the homeowner a free “put” to the lender.

For example, if I have a $500,000 mortgage on a house that is now worth $400,000 and I “put” the house back to the lender it used to cost me up to $35,000 ($500,000 principal - $400,000 REO price X 35% max marginal tax rate). After the Act it cost me nothing, I was given a free “put”.

A free “put” increases the likelihood of default and subsequent loss and lowers what buyers are willing to pay. The net effect was that the day the Act passed, all mortgage portfolios dropped in value, not just the sub-prime portfolios.

Using your analogy, even the good wine went down in value, due to no fault of any market participant or a change in supply and demand.

As a side note, this is why quantitative analysis in the mortgage market can be so difficult… because Congress can change your formula’s inputs retroactively.

Perhaps you could do a segment that asks Congress to consider their role in the creation of toxic assets.