A Surprising Twist To Liar Loan Securitizations

Here is another one of those academic papers examining the mortgage crisis that seem to be sprouting everywhere. This one concentrates on low doc and no doc loans and comes up with some conclusions you would expect and a somewhat surprising finding.

The study was done by some academics at Columbia and focused on one mortgage bank. The name of the bank is not divulged though the authors represent it as having been one of the ten largest originators in the country. The fact that the data comes from a single source might call the conclusions into some question but the fact that their data covers the period from 2004 to 2009 and that the bank originated loans in all 50 states probably helps offset the single source weakness.

The bank was evidently a big player in the “liar loan” business and generated loans directly and through brokers. The brokers were both long-term correspondents and brokers with no correspondent relationship.

To no one’s surprise they found that loans originated by brokers were 50% more likely to be delinquent than loans originated by the bank. The long-term correspondents loans tended to demonstrate a delinquency rate much more in line with the bank’s experience. By the way, 28% of the liar loans were delinquent 60 days or more by early 2009 and half of those were in foreclosure or short-sale status.

Now here’s the kicker. The bank was a big securitizer but it turns out that they tended to keep more of the bad no-doc loans than they sold. According to the researchers, the bank ended up holding loans with delinquency rates more than 5% higher than the loans they sold.

Why did they do this? Well, they didn’t plan it that way, but the authors speculate on two factors working against them. First, some of this stuff was so bad that they couldn’t unload it before it went into delinquency. Hard to sell loans with a first-payment default. Second, and this one is interesting, the investors were being picky and using up to the minute data to guide them.

If you think about it, it makes a lot of sense that particularly towards the end of the bubble investors were starting to wise up a little. It didn’t take a rocked scientist in 2008 to look around and decide that Florida, Arizona and Nevada loans might not have the best characteristics.

To an extent, this study answers at least partly the question of why banks ended up owning so much of this junk. Remember, they kept telling everyone they were selling it and then surprise, surprise it’s a big problem. Now here’s a hint that they were actually never ever able to unload the worst of the worst.

This is another piece of the puzzle. It’s probably going to take years for academics to sift through all of the evidence in order to figure out what really did go wrong. I suspect that we might find out that a lot of our commonly held beliefs about what caused the bubble and where everyone went so wrong are all wet. The problem is that we’re using that conventional wisdom right now to try and bail ourselves out of this mess. Maybe that’s why we aren’t having much success.

more: here (Link To Study)


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