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Charles street shuffle mac#

The sales business being what it is, the more unscrupulous and aggressive the sales operation, the more business it did. Since it's no longer necessary to have a balance sheet to originate mortgages, mortgage brokers became pure sales operations. In fact, it's almost as if everyone connected with the mortgage has turned into a salesman.

Wall Street, in turn, retains very little of the resulting mortgage packages it turns around and sells them to investors, who can hardly expect Wall Street to be responsible for each individual mortgage.

Instead of taking loans onto their own balance sheet, and losing money if they default, mortgage companies merely sell the loans they originate to Wall Street, pocketing a fee.

As is now quite painfully clear, the central problem with securitization is that nobody is really responsible for the credit risk: But it did arise, and with it came a big problem. However, without Freddie and Fannie, the securitization market might never have arisen. In bull markets, like the one that ran from 2000 to 2007, investors would buy mortgages even without the Fannie/Freddie guarantee - especially the so-called "jumbo" mortgages for large amounts that Freddie and Fannie could not legally provide a guarantee for.

Charles street shuffle mac#

However, with Fannie Mae and Freddie Mac guaranteeing most mortgages, the mortgage packages became quite standardized so that investors no longer needed to worry about the mortgages themselves. Without these two government-sponsored entities (GSE), the credit risk of each mortgage would be different, so it would have been very difficult to do the first bond issues. The government gave a huge assist to Wall Street in its efforts to take over the market by establishing Fannie Mae ( FAN) and Freddie Mac ( FRE). The broker combined all the loans it was purchasing into a shell company, which enabled it to repackage the debt and sell the resultant products to bond investors.

Under securitization, instead of making mortgage loans directly, mortgage bankers only "originated" the housing loans - doing whatever paperwork was thought necessary - before selling them to a Wall Street broker. There were other possible solutions to the problem, notably a federally financed S&L bailout that did not force them to disappear.Īnother solution could have made use of another new Wall Street product: The interest rate swap, under which S&Ls could have locked in a fixed rate on their deposit funding, thus securing their business against fluctuations in interest rates. Through securitization, however, Wall Street was able to take control of the enormous pool of mortgage loans, which showed obvious opportunities for massive profits.

Securitization was thus Wall Street's response to a genuine problem: the savings-and-loan sector's shrinking capital base and its limited ability to lend. It took nearly another decade for them finally to go out of business, but the damage had been done. By 1982, the great majority of mortgage lenders in the United States were insolvent, in that their capital had been lost. The Sad Emergence of Securitizationīut Jimmy Stewart and his peers were forced out of business by the 1974-82 inflationary surge, which caused short-term interest rates to rise sharply, while long-term returns on the lender's mortgage loans remained fixed. With the rise of interstate banking, that problem would have been soluble - mortgage loans would be more expensive in an area if a large national bank was their only potential source, but they would still be available. It is an appealing model, with only one real flaw if a local savings and loan is in financial difficulty it will not be able to attract deposits, and no mortgage loans will be made in that locality. Potter to change the character of his hometown, Bedford Falls, by offering affordable housing loans to the poor but upwardly mobile. You can see how it worked in the 1946 classic movie, " It's a Wonderful Life." Actor Jimmy Stewart plays George Bailey, heir to a local building-and-loan company, who battles the evil local capitalist Henry F. Traditionally, mortgage loans were made by small local institutions that took the credit risk themselves and who knew the borrowers personally. It's actually quite new, the result of the misdirected incentives caused by the mortgage-securitization business. Contrary to what Wall Street would have you believe, this appalling sloppiness that created the subprime mortgage scandal has not been a feature of every housing boom for the last half century.