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Great topic. I wrote this on my phone so I hope it makes sense.
I would love to claim that I saw it all coming, but that would be BS. I also have a mortgage banker’s view vs an investment banker’s view and I definitely didn’t have the sophistication to put things together coherently even when I saw the signs. That said, there were a few things that I noticed at the time that certainly make more sense in hindsight.
When I started in retail mortgage sales, other than the dot com bubble, things were smooth and the money was easy. Gov’t pressure to expand homeownership meant relaxing credit standards for even conventional loans, and it was already becoming the Wild West in terms of private product offerings. This had its pluses an minuses, of course.
From about 2000 to 2005, I worked in the NYC market for an expanding west coast based institution that was more like a thrift or S&L than a commercial bank. We wrote normal Fannie/Freddie paper but also a lot of funky IO/neg am “option ARM” stuff. The key things here were that this was NOT a subprime lender, so the rates were quite sharp, and at least in my market, the staff were trained on how to use these types of loans responsibly. We cleaned up. Best earning years of my life.
The Option ARM could take up a whole effort post itself, but the key thing is that it was designed for a particular kind of financially savvy buyer. Like anything niche-y it did not scale. During the early/mid 00’s, these niche loans, with their very low qualifying payments, started to be offered by more institutions, and this had the effect of qualifying buyers for loans they couldn’t afford. Without the knowledge to use these loans to their benefit, buyers found themselves over-leveraged. Add to this the gov’t emphasis on “homeownership” as a goal regardless of risk and we had quite the recipe for disaster.
Meanwhile, high-rate subprime loans were readily available, and - this is key - these loans were ALL securitized and sold to private institutions. The appetite for mortgage paper was immense. This was a thriving market for non-conforming loans that was supported by nothing really besides rising home prices. Less reputable mortgage originators would just churn their pipelines and perpetuate the issue based on the high appraisal values at the time (sidebar: Appraiser independence is another interesting topic but I’ll save that for another time too).
I moved from that shop to a large, conservative commercial bank during the run up to the ‘08 crisis, so I was a bit more insulated from what transpired, and I started to get my own education into what all this meant (for our jobs, home prices, the financial sector, and economy at large) from a colleague with a Wall Street background who joined our firm. Still at the time our take was that finance firms/investors are gonna do what they do and we were more concerned over the perverse incentives that the gov’t placed on lenders to expand credit. (Aside: I hate the OG CFPB with a white hot passion - I could go on about how bankers like me became the bad guys when this was all directed from DC and both Dodd and Frank can eat a bag of dicks, but I digress).
The mortgage industry got hit with the crisis about a year before Lehman failed, in what was still just called the Subprime crisis. If this had been limited to just subprime lenders, the industry could have absorbed the fallout. What happened instead was that several high-profile mortgage banks (IndyMac, American Home Mortgage, etc.) went bust all at once in the summer of 2007. This was the first real wake up call for me since the “Alt-A” lenders were wiped out along with actual subprime lenders. These are the loan portfolios that suddenly had no market that could not be priced due to the unknown risk contained in the securitized portfolios that led to the ‘08 crisis.
The response to this by the mortgage industry was that ALL non-Agency investors stopped buying MBS. Within a week, virtually all jumbo / ALT-A, and/or subprime outlets were unavailable, leaving only Agency paper or true in house portfolio lending at commercial banks e.g. Chase or Wells. This tightening led to more failures - still mostly within the mortgage industry - but when countrywide and especially WaMu failed, it was clear that the snowball effect was well under way.
So, I saw some signs, but I was really focused on the policy side of it at the time. This area has never really been widely discussed in my opinion. We got the CFPB which mostly annoys lenders with overlapping compliance hurdles but bears no responsibility for the financial health of the industry it regulates, and less product to offer. The Biden admin was right back there with pressure to expand credit to “underserved communities” until the very end, and I can see the cycle continuing.
When Trump II took office, we had a meeting with Compliance/Fair Lending where we pretty much shelved about a dozen stupid reg-based initiatives carried over from the Biden era CFPB.
(ex: We (meaning ALL LENDERS), for practical purposes, need a process buyers can follow if their property appraisal comes in below their personal estimate of property value. Despite this, CFPB made us create a redundant process to positively inform all buyers of their existing right to get a reconsideration of a low appraised value. ok, but CFPB failed to take into account that such ROV’s necessarily have to be very limited due to appraiser independence (bc we aren’t allowed to influence value). In effect this actually changes nothing for the buyers, except now they have the idea that they can justify any value they want, and we jump through all these hoops to just say no and look the bad guy again.
This is fantastic. Thank you.
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