Posts Tagged ‘mortgage-backed securities’
Brian Lehrer Show question
If you didn’t catch the Brian Lehrer Show this morning, you can hear my segment here.
I’m not sure I follow Ms. Katz’s explanation about the Community Reinvestment Act. If pro-CRA activists had to convince Fannie Mae to insure formerly redlined mortgagors, why would there be competition between Solomon Bros. and other sub-prime lenders and Fannie Mae to finance the mortgages?
I had to condense a decade of history into a brief explanation, so let me unpack the sequence of events that led from a drought of financing for high-risk borrowers in the 1970s to a ferocious race to the bottom by the end of the 1990s.
When the pro-CRA activists first persuaded Fannie Mae to buy mortgages they previously wouldn’t have, in the late 1980s, the Wall Street mortgage-backed securities market was still in its infancy. It was only in 1983 that Congress permitted open trading in mortgage-backed securities, and only with the tax code overhaul of 1986 was it even feasible for investment bankers to sell mortgage-backed securities on a large scale. Then it took a few years of persuasion and demonstrated returns to convince investors that mortgages to high-risk borrowers were worth betting on. The Wall Street-backed subprime market really took off in 1994, when mortgage lenders essentially ran out of new customers.
Once the subprime industry, backed by Wall Street mortgage-backed securities, got growing and producing returns by charging high interest rates and fees to high-risk customers, there was no looking back – it was a lucrative business that had to keep pursuing new customers to grow. Those customers were ones who either didn’t qualify for Fannie Mae/Freddie Mac-financed mortgages, even under those agencies’ newly generous lending standards, or were qualified but pushed into subprime by unscrupulous mortgage brokers.
All real estate is local
In the May issue of The American Prospect, I contribute one of “Five Ways of Looking at Risk,” pointing out that the basic set-up of the mortgage-backed securities market — a global market in debt-trading, supporting a product, real estate, that is rooted to a specific location — poses inherent risks that the market simply wasn’t built to deal with. I suggest some ways that home lending could once again become a local business while still taking advantage of the financial markets, and am sure there are many other possible models — someway, somehow, the government mortgage market reform project on the horizon will have to take on this challenge.
Problem solved!
The easiest way to bring bad banks back to health — just change how they tabulate the value of their mortgage-backed securities.
What does this mean for Treasury Secretary Geithner’s asset rehab program? If banks can keep bad assets on their books all tarted up to look like sexy ones, then there may be no reason to sell them — hell, the institutions will need all this “capital” to stay in business.
As if we need one, this is yet another reminder of how horrendously dangerous securitization of mortgages is. At every step of the way, the financial conditions underlying these mortgages have been fiction — and the lies just keep getting deeper and deeper.
If you haven’t seen it yet, Paul Krugman’s column last week calling for an end to securitization is essential reading. He and George Soros are the the two highest-profile voices so far calling so for a new financing model for real estate and other assets, though as Krugman alludes other economists are also coming to the conclusion that the old system is fatally flawed.
I’ve been pondering the same question Krugman has: Why does firming up the capital markets system we’ve got, rather than creating a more functional one, remain the almost unchallenged agenda for the Obama administration and Congress? One answer lies in the very design of securitization: its instruments are engineered to yield healthy returns to any type of investor imaginable, on their terms and on a predictable schedule — meaning that insurance companies, small banks, pension funds, you name it, were all feeding at the teat of the asset securities market. And despite all the chaos that has ensued recently, the institutions that are accustomed to hosting these securities as high-yielding stars on their balance sheets aren’t yet ready to give up the dream that the milk will flow again.
Loan modifications, nerd edition
If my article on loan modifications for The Big Money left you wanting more, Business Week has done a detailed, revealing and readable (considering the subject matter) look at what it will really take to modify mortgages to make them affordable. Between preemptive lawsuits from major investors and accounting standards designed to prevent monkey business in the management of mortgage pools, the technical obstacles to even the not-especially-helpful kinds of loan mods we’ve seen so far remain depressingly formidable.
On the bright side, those challenges may ultimately (this is my opinion now, not Business Week’s) doom the trend of tinkering with bad mortgages to nudge them to perform and leave across-the-board writedowns, through a formidable exercise of government power, as a necessary action if things get much worse. And given all current foreclosure and related economic trends it’s hard to see how they won’t.
The homeowner bailout
New from me, in The Big Money: Why Obama’s plan to ease troubled mortgages will be harder than it sounds. Here’s a tease:
You might think that straightening out a $400,000 mortgage would be massively simpler than righting sinking financial institutions nominally worth billions. Yet rescuing homeowners could turn out to be among the toughest bailout challenges of all.
How the homes we live in turned into the monsters that ate our economy and the United States became a nation obsessed with real estate.
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