All the Devils Are Here [157]
Scene 3: December II, 2006. Midmorning. An auditorium at the Office of Thrift Management. Lew Ranieri—yes, that Lew Ranieri—is giving a speech. His tone of voice may be mild, but his words convey something else entirely: anger, dismay, worry.
The occasion is an all-day housing symposium the OTS is putting on. The room is filled with bank regulators, housing lobbyists, economists, community activists, and members of the subprime mortgage establishment. Sheila Bair, the new chairman of the FDIC, is there. So is David Berson, the chief economist at Fannie Mae, and John Taylor, the longtime subprime critic from the National Community Reinvestment Coalition. Hank Paulson makes the welcoming remarks. Congressman Barney Frank gives the luncheon speech.
The main topic is the subprime business, which now accounts for around a quarter of the nation’s mortgages but which is clearly slumping. Ranieri is on a panel with Berson from Fannie Mae, a banker representing the Mortgage Bankers Association, and the deputy comptroller of the currency. Their presentations are full of on-the-one-hand, on-the-other-hand equivocations. There is general agreement that subprime mortgages are here to stay. A panel devoted to subprime fraud focuses entirely on borrower fraud; incredibly, not a single word is mentioned about the widespread fraud being perpetrated by the companies themselves.
Ranieri, however, has a much dimmer view of the state of the subprime mortgage industry than most others speaking today. Over the past few years, he has become horrified by what has happened to the mortgage-backed securities business he helped invent in a more innocent time. The lack of proper underwriting, Wall Street’s unending desire for poor-quality loans, the way triple-B tranches are being repackaged into new triple-A securities: this is not what Ranieri envisioned when he and Larry Fink and others were starting up the market. He had always just assumed that the vast majority of loans in securitizations would be good loans, not bad ones. Why would investors want to buy bad loans? The fact that no one seems to care anymore is shocking to him.
And that’s what he tells this roomful of subprime experts, bluntly and forcefully. The man who spent much of the 1980s trying—unsuccessfully—to minimize Fannie and Freddie’s role in the securitization business now laments the way they have been rendered irrelevant by the subprime securitizers. He can see now what an important and useful role they played: they were, he says, the “gatekeepers,” forcing mortgage companies to adhere to their underwriting standards. “If a mortgage originator didn’t follow Fannie and Freddie’s underwriting standards, nobody would buy them,” says Ranieri. “That standard has completely gotten pushed aside.”
Who now can keep the market in check? The rating agencies? Hardly. Government regulators? A joke. The private mortgage-backed securities market, says Ranieri, “is unchecked by today’s regulatory framework.”
He bemoans the layering of risk in subprime mortgages (“One of my favorites is a negative amortization ARM, combined with a simultaneous second lien and a stated-income loan”). He sneers at the phrase “affordability products,” the industry’s euphemism for subprime mortgages. He dwells at length on the rise of CDOs as a “major distribution mechanism” and laments their bewildering complexity. It is nearly impossible, he says, for investors to understand what they are buying.