In the recent issue of Businessweek, which has been spot on in its coverage of the housing market, interviews the inventor of mortgage-backed securities, Lew Ranieri.
The first pool of home loans was sold in 1977 and the technique is probably unfairly the source of the blame of the credit crunch we have now.
>To accommodate the demographic demand, banks had to keep raising equity, which wasn’t realistic. Securitization allowed them to fund the loans off the balance sheet.
Basically create a pool of mortgages to investors who took this concept a step further and cut them into a smaller pieces and sold them off, effectively offloading the risk onto someone else, who usually didn’t understand the risk they were taking.
In my short time working with Wall Streeters last year I was told several times about the “nexus between fear and greed.” In real estate speak, a fair comparison would be the pendulum that swings between a buyer’s market and a seller’s market.
>If you diminish fear, you get more greed. People got braver issuing this stuff. All the participants felt they could act merely as agents and collect fees. Nobody was prepared to say “I have liability.”
Ranieri sumarizes the situation with the following points:
* The industry players are fighting – once that stops, it’ll get fixed quickly.
* Empower the servicer and pay them to be a fiduciary.
* Start with second mortgages – can’t restructure first mortgages until that is resolved.
* Use the resources of Fannie, Freddie and FHA (yikes! they lost billions, as of late).
The problem likely isn’t securitization, its overlaying appropriate regulation to create a rational and fair playing field. Of course, this reduces the rapid profit potential (or loss) and I suspect there will be another product developed in the next several years while securitization reverts to a more mundone financial technique and Wall Street seeks to reinvent the next “great thing.”
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I’m not so sure the technique of selling MBSs is being unfairly blamed for this mess. It certainly is at the eye of the storm. Mr. Ranieri and others familiar with mood swings of Wall Street between fear and greed should all be aware that the fear most of the operatives experience the most intensely is the fear of being caught.
Ranieri claims status of an icon in helping house the baby boomers. He along with many of the “insiders” remained mute when it was obvious the regulatory framework was not functioning.
We know now that Wall Streeters discovered the regulators were on vacation and their fear of being caught was suppressed, and their greed shifted to criminal activities.
Screw the delay regulation may cause. It has been clear for several thousand years that the lending industry as a whole, and there are notable exceptions, could care less about anything other than their own bottom line.
The lenders have their job to do and we need them, but they obviously can’t guard the hen house.
It is patently obvious that the lending industry will strenuously fight any regulation, existing or proposed, that might protect consumers, taxpayers and the economy from their excesses.
Having read Mr. Ranieri’s comments somewhat between the lines, I believe he personally benefited from his “invention.” So was it just an oversight that he didn’t tell us all when his idea was being abused while the regulators looked the other way?
[…] was Jonathan Miller from Miller Samuel. We had the pleasure of picking Jonathan’s brain about securitization of mortgages contributing to the foreclosure mess, how to accurately value a property in a declining market, the […]
Has anyone yet balanced the benefits and detriments of innovative equity mining and lending schemes? And how id it take 30 years to realize there was a whole the size of an aircraft carrier in this MBS rage?