Sen. Levin gives a succinct history mortgage-securitization mania and bank collapse

[swag]

http://levin.senate.gov/newsroom/release.cfm?id=323765

Excerpt:

Wall Street came up with the mechanism of securitization. Lenders bundle up large numbers of home loans into a loan pool, and calculate the amount of mortgage payments going into that pool from the borrowers. A shell corporation or trust is formed to hold the loan pool, and the revenue stream is used to create bonds called mortgage backed securities that could be sold to investors. Wall Street firms helped design the loan pools and securities, worked with the credit rating agencies to obtain favorable ratings for the securities, and sold the securities to investors like pension funds, insurance companies, municipalities, university endowments, and hedge funds.

For a while, securitization worked well. But at some point, things got turned on their head. The fees that banks and Wall Street firms made from their securitization activities were so large that securitization ceased to be a means to keep capital flowing to housing markets and became an end in itself. Mortgages began to be produced for Wall Street instead of Main Street. And Wall Street bond traders sought more and more mortgages in order to generate fees for their companies and large bonuses for themselves.

To satisfy Wall Street’s growing appetite for mortgage backed securities and to generate additional income for themselves, banks began to issue mortgages to, not only well qualified borrowers, but also high risk borrowers. High risk loans provided a new fuel for the securitization engines on Wall Street.

Banks liked high risk home loans, because they tended to generate higher fees and interest rates, and produced more profits than low risk loans. They could also be sold quickly, keeping the risk off the bank’s books. Wall Street treated high interest rate loans like gold ore and were willing to pay more for them.

. . .

[louis-t]

1. Got the email today. Very well done.

Easy to read, understand. No hysteria, just facts. Let's see ANY repuke do that.

[swag]

2. Most Republicans are still wrongly blaming the Community Reinvestment Act,

even though that position has been thoroughly debunked.

[louis-t]

4. I know, "Barney Frank did it!!1!11"

My friends and relatives are convinced.

[sandnsea]

3. 2006 - As Homeowners Face Strains, Market Bets On Loan Defaults

It wasn't exactly a secret. This never should have been blamed on low-income homeowners in the first place. Wall Street did it on purpose.

http://www.realestatejournal.com/buysell/mortgages/20061031-whitehouse.html

"The ease with which folks such as Mr. Spirou were borrowing against their homes (from WAMU) sent warning signals to some investors. The concern: that in their rush to attract customers amid the housing boom, mortgage lenders were lowering their standards. In 2005, for example, the share of interest-only loans grew to about 18% of all subprime loans, from next to nothing in 2001, according to data provider First American Loan Performance. Over the same period, the share of subprime loans that required little or no documentation of the borrower's income grew to more than 16% from about 10%.

"We looked at this and thought we're going to see lenders who are misusing these tools," says Mr. Whalen. "We're going to see the performance of their bonds deteriorate."

At about the same time, in early 2005, Wall Street bankers were developing a new kind of derivative contract that would allow investors such as Mr. Whalen to make bets based on their misgivings. Called a credit-default swap, it had previously been applied mainly to corporate and sovereign bonds. Like an insurance contract, it pays off if a subprime-backed bond suffers a certain amount of losses to defaults. The holder, known as a protection buyer, makes regular payments to a bank or other counterparty for the insurance, and also has the right to resell the contract. If defaults prove higher than expected and the bond starts to look riskier, the value of the contract rises, and the holder can resell it at a profit."

[swag]

5. Good find. It's all there in black and white.

[geek tragedy]

7. "Counterparty risk" bit them in the ass. nt

[amborin]

9. and Goldman Sachs bet against the bad bundles they were selling to investors

[bridgit]

6. ^

:kick:

[pnorman]

8. K & R, mainly to enable me to keep a closer eye on the valuable links on this thread!

n/t

[dmr]

10. Here's another link. Exhibits from today's Senate Hearing with WaMu

http://hsgac.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=d16e2709-2e60-4b1e-9255-37a40aefdc13

Senator Levin was angry.