In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Wednesday, August 13, 2008

My How Time Flies

by Tanta on 8/13/2008 08:17:00 AM

The Washington Post has a lengthy article up this morning on bank failures:

First the borrowers. Now the banks.

Federal and state regulators have closed eight banks this year, four since the start of July, as rising borrower defaults on residential and commercial real estate loans start to push some lenders into default, too.
Um, did we like take a Rip Van Winkle nap in late 2006 and just now wake up? As I recall the last two years, it was first the borrowers, then all the wacky securities, then the GSEs, then the banks.

In fact, as I recall things, we were once pretty much encouraged not to worry too much about the banks, because the storyline was that all the risky lending involved selling and securitizing loans, not stuffin' them on the old balance sheet. Here's a blast from the past, which I fondly remember as the day the NYT editorial board first learned about this thing called securitization. From September of 2006:
The housing boom would never have lasted as long as it did if mortgage lenders had to worry about being paid back in full. But instead of relying on borrowers to repay, most lenders quickly sell the loans, generating cash to make more mortgages.

For the past few years, the most voracious loan buyers have been private investment banks, followed by government-sponsored housing agencies, like Fannie Mae. The buyers carve up the loans into mortgage-backed securities — complex i.o.u.’s with various terms, yields and levels of risk. They then sell the securities to investors the world over, at breathtaking profit. The investors earn relatively high returns as homeowners repay their mortgages.
Back in 2006, the fashionable thing to say was that if banks had only held their loans rather than securitizing them, they would have controlled credit risk better because they had skin in the game.

I guess it was a bit more complicated than that.