VeraSage

Gene E Moore

Aloha Ed!
True we are seeing the heart (and hurt) of the one of our big economic troubles.
Just want to a sure you, mortgage-backed securities you write or, are a result of several things. 
The foremost is the Community Reinvestment Act.  The demise of Savings and Loans by the Big Banks.  A major change in General Accepted Accounting Practices.
Licensing Real Estate Appraisers is another biggie!
I was a Chief Loan Officer, twice.  No, they were not big Savings and Loans.  I was able to be involved in the every day running of the S&L;than other CLO’s.
When I was a CLO the first time, I was named in more lawsuits dealing with the Community Reinvestment Act.  We never lost, but it did cost us time and a whole lot of money.  The groups, (not individuals) came after us to lend in areas we did not have customers, and if we did get an application, it was turned down, because they did not qualify, it was a type of property we did not lend on (over 4 unit apartments).  The lawsuits were a form of blackmail to get us to lend. 
The thing that saved us, was the census maps I kept up to date, to where we had loans and savings customers.
Mostly during this time, we would have true Loan Officers (salaried and not on commission) to underwrite and pre-approve the loans.  The “Loan Committee” would truly be the ones who approved the loan.  Yes, we had outside appraisers, but we still did a desk review, as all the Loan Officers I ever had working for me, came up the ranks as appraisers.  Before Credit Scoring, we were collator lenders.  True you had to personally qualify for the loan, but IF we could not get loan money out of the house if you went south on us, we did not make the loan.
{I also did loan reviews and loan audits for the big players in the secondary market, in those days it was not Freddie and Fannie, it was the big insurance companies.  Never found any forced values by Appraisers.  But found fraud by buyers, sellers, borrowers, Realtors, Escrow Officers, and Mortgage Brokers.}
When the General Accepted Accounting Practices changed, and we could no longer book our points and fees up front, but had to spread them over the live of the loan, activity selling loans became a big deal.  When you were operating on a 2 point spread, between what you paid on savings accounts and what you lent out.  It was a big deal.
When lenders found they could make more money selling loans, they had to find ways to get volume.  That is when more Mortgage Brokers and commissioned Loan Agents came into the market.  It was no longer about quality it was about volume.  (GREED!)
With more loans coming into the system, they Freddie and Fannie expended on the investment side to bring in more money to lend. 
It was so good at times, there was more money to lend out than qualified borrowers. 
So today, the people who got in on this easy money are not able to pay, thus losing their properties, in turn not funding the return on the mortgage-backed securities. 
Oh, I could get into taking $100,000 and making that into a $1,000,000 in loans, but that will be for another time.
Just want to share my two coconuts worth on how were get to this trouble.

Ed Kless

Gene,

Thanks for the additional explanation. I mistitled the post, I should have specifically mentioned that this was about CDO/MBS.

I wholly agree that the Community Reinvestment Act (and for that matter the Federal Reserve) made a major contribution to the mess.