Thursday, July 17, 2008

...and you may ask yourself, "well, how did I get here?"

Nice history of how the mortgage giants mis-used their low implicit cost of capital to expand into the very investments they were supposed to avoid,
Joshua Rosner, an analyst at Graham Fisher, a research firm, who was one of the first to identify the problems in the mortgage market in early 2007, reckons Fannie and Freddie were buying 50% of all “private-label” mortgage-backed securities in some years—that is, those issued by conventional mortgage lenders. This left them exposed to the very subprime assets they were meant to avoid. Although that exposure was small compared with their portfolios, it could have a big impact because they have so little equity as a cushion.

1 comment:

  1. Here is a 2001 paper by Rosner waring of the eventual risks:


    This report assesses the prospects of the U.S. housing/mortgage sector over the
    next several years. Based on our analysis, we believe there are elements in place
    for the housing sector to continue to experience growth well above GDP.

    "However, we believe there are risks that can materially distort the growth
    prospects of the sector. Specifically, it appears that a large portion of the
    housing sector’s growth in the 1990’s came from the easing of the credit
    underwriting process. Such easing includes:
    · The drastic reduction of minimum down payment levels from 20% to 0%
    · A focused effort to target the “low income” borrower
    · The reduction in private mortgage insurance requirements on high loan to
    value mortgages
    · The increasing use of software to streamline the origination process and
    modify/recast delinquent loans in order to keep them classified as ‘current’
    · Changes in the appraisal process which has led to widespread overappraisal/
    over-valuation problems
    If these trends remain in place, it is likely that the home purchase boom of the
    past decade will continue unabated. Despite the increasingly more difficult
    economic environment, it may be possible for lenders to further ease credit
    standards and more fully exploit less penetrated markets... The virtuous circle of increasing
    homeownership due to greater leverage has the potential to become a vicious
    cycle of lower home prices due to an accelerating rate of foreclosures."