They gambled with our home loans, but the game must go on
A who’s who of the companies that helped perpetrate the housing market debacle had a get-together in Las Vegas this week.
More than 6,000 people were in the gambling capital for the annual gathering of the American Securitization Forum, a group that includes lenders, investors, traders, lawyers, accountants, credit-raters and other major players in the business of turning mortgages and other loans into bonds.
Standard & Poor’s was there, for example, as were Bear Stearns Cos. and Countrywide Financial Corp.
Things may be tough for Countrywide, the mortgage giant that last month agreed to sell itself to Bank of America Corp. at a fire-sale price, but the Calabasas company still dug deep to sponsor the Super Bowl party for forum attendees Sunday at the opulent Venetian hotel.
Once the group got down to business Monday morning, however, the panel discussions on the state of the industry had a much different tone from those of last year’s meeting, held just before the bottom began to fall out of the housing market.
This year, key sessions focused on “Rebuilding Investor Confidence” and “Loss Mitigation.”
Perhaps because there’s no crying in Vegas, there was no panel of devastated homeowners who are facing foreclosure because they took out dicey loans cooked up for the securitization sausage machine.
But Robert K. Steel, a former Goldman, Sachs & Co. executive who is the Treasury Department’s undersecretary for domestic finance, came closest to speaking for the masses when he addressed the forum Tuesday.
“While being an advocate for the benefits of your industry, it is also important for me to be straightforward,” Steel said. “We must be honest and admit some degree of malfeasance. It is clear that in some instances market participants acted inappropriately.”
“Malfeasance” in the financial business typically involves stealing. In this case, the primary sin was far different. It amounted to giving people too much money.
Though the word “securitization” is a true eye-glazer, the concept is relatively simple. Rather than rely solely on the banking system to provide credit to consumers and businesses, Wall Street over the last 30 years has sought to link borrowers who need money with investors willing to provide it.
By packaging mortgages, credit card balances, student loans and other debt into interest-paying bonds, securitization can be a win-win proposition: Investors earn decent interest rates and borrowers have more access to credit, presumably at lower rates than if banks alone were calling the shots.
But as usual when Wall Street is involved, greed took over in the securitization market in recent years, particularly in the mortgage end.
Seemingly everybody wanted to buy a house, whether they could afford it or not. Lenders wanted to satisfy that appetite, so they made ever-riskier loans to ever-riskier borrowers. The securitization industry was only too happy to take those loans and package them into bonds for investors, whose own greed -- along with the complexity of many mortgage-backed securities -- blinded them to the potential for huge losses if the loans were to go bad.
“Rightly or wrongly, to some extent securitization was seen as feeding this monster,” said Bianca A. Russo, a managing director at banking titan JPMorgan Chase & Co., speaking on a forum panel on regulation.
Along the way, everyone involved in the securitization process got their cut in the form of fees or commissions, which helps explain how the American Securitization Forum conference attendance mushroomed from about 1,000 people five years ago.
Now, as home loan delinquencies and foreclosures soar, Congress, financial regulators and federal prosecutors are bearing down on the industry. Much of the discussion at the Vegas conference was about restoring sanity to lending decisions and forcing better disclosure of the quality of the loans that back trillions of dollars of bonds.
Inevitably in these situations, of course, the feds close the barn door after the bulls have run amok.
The marketplace already has taken care of curbing lending, abusive and otherwise: Many investors have shrunk from buying securitized loans.
Bonds tied to sub-prime mortgages, the riskiest of such loans, have seen the most dramatic fall-off. But the volume of debt packaged for sale to investors also declined last year in the auto, student-loan and small-business-loan sectors, according to data tracker Inside Mortgage Finance.
In the mortgage business these days, many lenders simply won’t make a loan unless they can sell it to a federally backed buyer. And a growing number of nervous banks are cutting back on loans to businesses, a Federal Reserve survey showed this week.
There may be a temptation to wish for a drastic contraction of the securitization business as punishment for its wretched excesses on the home loan side. How about, if they want to meet, make ‘em trade down from the Venetian to a Howard Johnson?
The problem is that we’re seeing what happens to the modern economy when lending dries up. If money continues to tighten, denying credit to many businesses and consumers, it will only become harder for the economy to climb out of its rut.
What’s more, in the long run pension funds and other retirement plans would just be hurting themselves, and their retirees, if they were to forgo the interest rates they could earn on securitized debt. Despite the sub-prime disaster, most securitized loans have been money good over the years.
The harsh truth is, if the securitization business -- sullied though it may be -- can’t celebrate a comeback in the next few years, the pain won’t be contained there.
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