Mortgage Banking
September 2008
Monday-morning quarterbacks are finding plenty to blame for the creation of a housing credit bubble that has dramatically burst. While there's a growing laundry list of causes, there appears to be emerging consensus on some primary drivers, such as monetary policy and the unchecked expansion of mortgage credit by non-banks. This two-part series examines the details.
By Robert Stowe England
As bubbles go, this one is probably going to be a modern record-breaker.
The worldwide toll in writedowns at banks and financial institutions for the housing credit bubble in the United States is now expected to top out at $565 billion, according to the Washington, D.C.-based International Monetary Fund's (IMF's) latest semi-annual Global Financial Stability Report released this past spring. This figure for the rising toll from the mortgage market's troubles is much higher than the then-alarming prediction of a $400 billion loss early this year from Jan Hatzius, chief economist at Goldman Sachs & Co., New York.
Indeed, the global-contagion effect from the U.S. mortgage meltdown is expected to approach an eyebrow-raising trillion dollars-or more precisely, $945 billion, according to the IMF.
Besides the $565 billion in losses on U.S. mortgages, there is a projected $240 billion in losses on debt backed by commercial real estate, $120 billion in losses on corporate loans (such as leveraged buyouts) and $20 billion in losses on consumer loans and credit cards, the IMF calculates. The other kinds of debt lost value as investors fled highly leveraged investments of all types while managers of hedge funds and a range of financial institutions sold assets to improve liquidity.
The IMF was fairly blunt in its assessment of the contagion effect: "What began as a fairly contained deterioration in portions of the U.S. subprime market has metastasized into severe dislocations in broader credit and funding markets that now pose risks to the macroeconomic outlook in the United States and globally."
The final tally of the bursting of the bubble should also include the meltdown in the equity markets around the globe-with an estimated $7.7 trillion loss by early this year, according to Charlotte, North Carolina-based Bank of America's chief market strategist Joseph Quinlan.
A global loss of 14.7 percent in equity values from the peak in October 2007 through the end of January exceeded the losses in prior global crises in recent decades, Quinlan calculated, including the next biggest loss leader: a 13.2 percent loss in equity values three months after the collapse of the hedge fund Long-Term Capital Management in 1998. It was also higher than the 9.8 percent plunge three months after Wall Street's Black Monday in October 1987.
Then there's the cumulated $880 billion loss in home equity in the United States reported by the Federal Reserve's estimate for the first quarter of 2008. According to the Fed data, released in June, Americans' equity in their homes represented just 46.2 percent of their properties' market values in the first quarter-the lowest level reported in more than 50 years.
Such staggering losses from the housing credit bubble raise the obvious questions: Why did this happen? What caused it? What important lessons can we learn from this experience to shape future policies and practices?
"Looking back, enormous mistakes were made," says Lyle Gramley, former Fed governor and senior economic adviser at the Stanford Group, Washington, D.C. "If you look for villains, there are lots of them," Gramley says. He then runs down a list, including "economists like me who didn't understand what was going on; borrowers, lenders, credit-rating agencies, financial investors here and abroad; the Federal Reserve and other federal agencies for not using the regulatory powers they had," he says.A compelling laundry list of ingredients for the witches' brew that led to the credit bubble is offered by Mark Zandi, chief economist at West Chester, Pennsylvania-based Moody'sEconomy.com. "We should all recognize that we are all a party to this mess," he says. "First there is the borrower, and certainly the [real estate] investor, the flipper. Many were disingenuous [about their income, job and savings], perhaps bordering on the fraudulent, when they applied for their loans," he says.
"Many current homeowners knew they were getting in over their heads, but hoped that house prices would continue to rise and [they would be able] to get out in the end," he says.
The lenders are also to blame, says Zandi. "They were complicit in the borrowers' sleight of hand," he says. "In many cases they were aggressive fly-by-night lenders, finance companies that were lightly regulated," he says.
Wall Street is also to blame, Zandi says. "The investment banks [that] took the loans and packaged them" ran their operations like a machine "set on autopilot," he says. "They didn't think about the risks involved and who was taking [them]. They didn't do due diligence on loans put into securities. They thought that by tranching it up, it would all work out," he says.
"Securitization broadly" must also be faulted, says Zandi, "It has lots of pluses," he says, "but the big negative is that it left everyone off the hook. No one at the end of the day had responsibility for credit risk."
The credit-rating agencies also played a contributing role, Zandi says. "I don't think anything nefarious was going on," he adds. While people have been saying that the dealers who put together the securitizations were engaged in "ratings shopping," Zandi does not think that is the problem.
The rating agencies "did what they've always done," he says. "They took data they were given, made judgments [based] on that on the bonds being issued," he say s. "Models were based on short pieces of history and didn't have data on subprime and alt-A-at least not in a down period."
To make a proper rating and to determine quality, one "needs data from all types of environments"-the good and the bad times, he says.
The rating agencies underestimated the stresses the mortgage bonds would come under, and made faulty assumptions about how many loans would prepay before rates were to reset on adjustable-rate mortgages (ARMs). They did not consider the impact on the bonds if the mortgages did not prepay and refinance before reset, he adds. And finally, "They didn't count on the fact that house prices would stop rising and credit would stop flowing," Zandi says.
Then there were the regulators, Zandi says-"Where were they?"
He says it was clear there were problems with subprime and alternative-A lending. "It took a long time for the [bank] regulators to come together to issue guidance," he says. "And it wasn't until the end of 2006" that the regulators issued guidance for interest-only and negative-amortization loans. "It was very difficult to get everyone on the same page," he says.
Indeed, it was "a period of deregulation, not regulation" with the capital requirements under Basel II, leaving market players room to move many assets off the balance sheet, he says.
Global investors were also at fault, according to Zandi. "They were told by the rating agencies that the ratings [they issue] are not investment advice and you have to do your own due diligence," he says. The investors did not listen to these warnings.
"They made a big bet on the U.S. market and U.S. homeowners, and didn't do their homework," he says. "They thought they had a triple-A rating. They thought the U.S. home would never fall in value," he says.
Global investors, in fact, were sitting on a ton of cash because of global monetary policy that was aggressively easing. "They were figuring out how to deploy dollars, not whether they were doing it well or not," Zandi says.
Finally, there was the monetary policy of the Fed, Zandi says. Indeed, virtually all observers have identified the decision of the Fed under former Chairman Alan Greenspan to lower interest rates to 1 percent in 2003 and keep them there until June 2004 as a cause-and for some, the overarching cause-of the housing finance bubble.
"The very low [interest] rates that prevailed for so long created an environment for the speculation that occurred," Zandi says. The speculation would not have made sense without the very low interest rates. When house prices were rising 5 percent and 10 percent a year, and fixed mortgages rates were 5 percent, "that's a negative real interest rate," says Zandi. Under those circumstances, "people will borrow to the hilt," he says.
Gramley, too, cites the role of the Fed. "I have a recollection of an interview that Alan Greenspan gave to Barbara Walters," Gramley says. "She reminded him that the late [Fed] Governor Edward M. Gramlich [who served on the Fed from 1997 to 2005] came in to see him about the subprime market, and this was brushed off by Greenspan," Gramley says. "Why did he not take it more seriously?," Gramley asks. "I didn't get it. This is the man who is described as the greatest central banker who ever lived." Gramlich, who died of acute myeloid leukemia last September at the age of 68, wrote Subprime Mortgages: America's Latest Boom and Bust, published in June 2007 by the Urban Institute, Washington, D.C. As Fed governor, he had favored tightening regulation of subprime mortgages and opposed lowering interest rates in 2002.
Gramley is not alone in pondering the role of former Fed Chairman Greenspan. Indeed, as the market meltdown reached a crescendo on March 16, 2008-just before the Fed engineered the rescue of Bear Stearns & Co. Inc. by JPMorgan Chase & Co., both based in New York-there was a rising chorus of naysayers blaming the Federal Reserve and Greenspan for lowering the Federal Funds Rate too low (to 1 percent) in 2003 and keeping rates too low for too long. Indeed, the chorus of critics has swollen, and it is still singing "You Done Me Wrong" to its old friend Greenspan.
Economist David Jones, chairman of Investor Security Trust Co., Fort Myers, Florida, and president and chief executive officer of DNJ Advisors LLC, Denver, agrees that the Fed's interest-rate policy is "obviously one of the key factors" in the housing boom that ran from 2002 to 2006. "[We] can all do extremely well in our analysis with hindsight," Jones says, noting that the same people who heaped praise on Greenspan in the past are the same people now critical of him in hindsight. "In the circumstances he was operating in in 2003 and 2004, there was a very weak economic recovery under way," Jones says.
In his conversations with Greenspan, Jones recalls that the former Fed chairman expressed concern at the time about deflation and the dangers it posed, as seen in the recent experience of Japan, "where their asset price bubbles in real estate and stocks burst in the late 19805 and then they had more than a decade during the 1990s of recurring recession and inflation," he says.
Concerned that the U.S. economy might falter and sink into deflation, the Fed under Greenspan's leadership "did move the overnight funds rate to a 46-year low of 1 percent and kept it there for roughly a year," Jones says. The timing of the low interest rates sent house prices soaring, he concludes.
Jones contends that the rise in housing prices should be labeled a "boom" and not a "bubble," while the expansion in housing credit is "clearly a bubble."
Jones agrees with Greenspan's contention at the time that housing is, to a major degree, regional. Thus, while some places had spectacular housing booms-California, Nevada, Arizona and Florida-many regions did not have a boom.
"We had a credit bubble that supported a housing boom," he says. Monetary policy should not be blamed as the sole cause, he adds. "I think you can say that low interest rates are generally a necessary condition for a massive housing credit bubble, but not a sufficient condition," Jones explains.
Greenspan's defense
While Greenspan declined a request for an interview to respond to critics of his low-interest-rate policy, he has provided through articles, a lengthy blog and interviews a number of defenses and justifications for his actions at the helm of the Fed. The first hint of a defense appeared in his March 17 Financial Times article titled "We Will Never Have a Perfect Model of Risk."
In that article, he wrote, "The current financial crisis in the U.S. is likely to be judged in retrospect as the most wrenching since the end of the Second World War," putting the current global financial fallout as the biggest crisis in 60 years. While admitting the scope of the crisis, Greenspan finds the cause of the problem rooted in the failure of risk management at financial institutions.
"The essential problem is that our models-both risk models and econometric models- as complex as they have become, are still too simple to capture the full array of governing variables that drive global economic reality," he wrote. His conclusion is fairly muted: "We will never be able to anticipate all discontinuities in financial markets."
His advice is a steely resignation to the whims of financial fate: "In the current crisis, as in past crises, we can learn much, and policy in the future will be informed by these lessons. But we cannot hope to anticipate the specifics of future crises with any degree of confidence. Thus, it is important-indeed crucial-that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition."
Greenspan's article generated a shower of criticism, which can be found on the Financial Times' online version, ft.com, in the Economists' Forum section at http://blogs.ft.com/wolf forum/2008/03/we-will-never-have-a-perfect-model-of-risk. Paul De Grauwe, professor of economics at the Catholic University of Leuven, The Netherlands, wrote the following comment: "Greenspan's article is a smokescreen to hide his own responsibility in making the financial crisis possible."
De Grauwe points to the role played by low interest rates. "The point is not that in 2001 the Fed reduced the interest rate too much when it cut it from more than 6 percent to less than 2 percent in less than a year. This was probably the right thing to do in a recession. The problem is that it kept the rate there for too long, when the economy showed signs of recovery. This laid the groundwork for a massive credit and liquidity expansion, which in turn created an asset bubble in the housing market," De Grauwe wrote.
De Grauwe quotes from Greenspan's book, The Age of Turbulence, in which he discusses the new financial instruments on Wall Street and concludes: "'Why do we wish to inhibit the pollinating bees of Wall Street?' (p. 372). The problem is that the financiers of Wall Street were mostly pollinating themselves," De Grauwe writes.
Greenspan penned a response to his critics that was posted April 6, 2008, on ft.com's Economists' Forum at http://blogs.ft.com/wolf forum/2008/04/alan-greenspan-a-response-to-my-critics. "I am puzzled why the remarkably similar housing bubbles that emerged in more than two dozen countries between 2001 and 2006 are not seen to have a common cause," Greenspan wrote. "The dramatic fall in real long-term interest rates statistically explains, and is the most likely major cause of, real estate capitalization rates that declined and converged across the globe. By 2006, long-term interest rates for all developed and major developing economies declined to single digits, I believe for the first time ever," he wrote. At the time the Fed began raising interest rates in 2004 and 2005, he commented on the "conundrum" that long-term rates continued to stay low despite increases in short-term rates.
Greenspan also tackled the notion that banking regulators should have moved more quickly. "Regulators, to be effective, have to be forward-looking to anticipate the next financial malfunction. This has not proved to be feasible. Regulators confronting real-time uncertainty have rarely, if ever, been able to achieve the level of future clarity required to act preemptively," he wrote on ft.com's Economists' Forum. "Most regulatory activity focuses on activities that precipitated previous crises and that investors have long since largely abandoned, although new laws may prevent recurrences. New problems, to repeat, are by their nature incapable of being anticipated with any degree of confidence," he added.
Greenspan continued: "Aside from far greater efforts to ferret out fraud (a long-time concern of mine), would a material tightening of regulation improve financial performance? I doubt it. The problem is not the lack of regulation, but unrealistic expectations about what regulators are able to anticipate and prevent," he wrote on ft.com's Economists' Forum. He added: "Could tightened regulation of subprimes have contained some of the reprehensible, and presumably criminal, acts of lenders? Probably. But the broader crisis would likely have arisen even with increased micro-surveillance."
Finally, Greenspan concluded, "The core of the subprime problem lies with the misjudgments of the investment community. Subprime did not break from its localized niche status until 2005." He cited current Fed Chairman Ben Bernanke's observation that the deterioration in underwriting standards appears to have begun in late 2005, citing the delinquency data then emerging on performance of loans made after that time.
Greenspan lays out his argument on the creation of the credit bubble as follows: "Subprime securitization exploded because subprime mortgage-backed securities (MBS) were seemingly underpriced (high-yielding) at original issuance. Subprime delinquencies and foreclosures (in a rising home-price market) were modest at the time, creating the illusion of great profit opportunities. Investors of all stripes pressed securitizers for more MBS. Securitizers, in turn, pressed lenders for mortgage paper with little concern about its quality. As a consequence, underwriting standards collapsed, and mortgage originations and securitizations rose to far greater heights than would have occurred without securitization."
Given this situation, Greenspan concluded, "Even with full authority to intervene, it is not credible that regulators would have been able to prevent the subprime debacle."
Greenspan's faith in competitive free markets remains unshaken, he wrote. "I have been surprised by the fierceness of investors in retrenching from risk since August [2007]. My view of the range of dispersion of outcomes has been shaken, but not my judgment that free competitive markets are by far the unrivaled way to organize economies. We have tried regulation ranging from heavy to central planning. None meaningfully worked. Do we wish to retest the evidence?"
Greenspan's defense led to some even sharper criticisms of both the Fed's policy and the role of the U.S. government in the housing credit bubble.
Christopher Whalen, co-founder of Institutional Risk Analytics, Torrance, California, began a comment to Greenspan's own defense by stating it was not Greenspan's monetary policy but his "dropping the ball" on bank supervision and market structure that was his "mortal sin."
"[T]he Fed's Washington staff, other regulators and the Congress allowed and enabled Wall Street to migrate more and more of the investment world off exchange into the opaque world of over-the-counter [OTC] instruments," Whalen wrote.
In an interview with Mortgage Banking, Whalen explained that the problem was the proliferation of a lot of different instruments that were not standardized. "There's a cottage industry of analysts who follow this stuff" who could model pricing based off trading in standardized instruments or even references to standardized instruments. The analysts, however, do not follow the exotic OTC bilateral instruments that began to proliferate, "because it's too complicated and each deal is different," he maintains.
Whalen argued in his comments that Bear Stearns failed "not because it had too little capital or too little liquidity, but because the thousands upon thousands of OTC trades that flow through the firm's books are bilateral rather than exchangetraded." Bear Stearns was "killed" not out of a lack of capital or liquidity, but from "the understandable fear of counterparty risk," Whalen wrote.
The conundrum
Some of Greenspan's arguments have merit and deserve a careful hearing, according to economist Jones. "Greenspan was correct in highlighting [that] inflation expectations [and thus long-term interest rates] were coming down, certainly in the [United States], and to some degree in Europe as well," he says. This was how Greenspan explained the "conundrum" of longterm interest rates continuing to fall even after the Fed began to raise interest rates in June 2004.
"And, you know, in the truly ironic sense, the Fed is almost a victim of its own success," Jones argues. "Fed officials have referred to something called The Great Moderation over the last 25 years, in which you can demonstrate the volatility in real GDP [gross domestic product] growth and inflation has come down . . . and that we have been growing at a sustainable low inflation pace over this period," Jones says. "Thus, long-term rates were kept lower than they otherwise might have been, even when the Fed belatedly started tightening," he says.
"Greenspan also got into this global savings-glut argument, which is a little bit tricky," says Jones. "And there were some other Fed officials who bought into this, including [current Fed Chairman] Bernanke, when he was a governor, I think," he says. "The thesis is that the intended savings in the world exceeded the intended investment," Jones says. He thinks that Greenspan has a valid argument on this point.
"The simple fact is [that] if intended global savings exceeds intended global investments, long-term interest rates should come down." Jones notes that there are some, such as economist John Taylor at Stanford University, Stanford, California, who have criticized Greenspan on this point and who contend that ultimately savings and investment are equal. Jones responds to Taylor's argument as follows: "Well, yes-they are [equal], ex-post. They have to equate. The question is, what do interest rates have to do [in order] to equate them?" The answer, as Greenspan alleges, is that interest rates fall so that intended savings and intended investment are equal, Jones explains. "So, I give Greenspan some credit for coming up with that argument," he says.
Another potential cause of the global glut in savings is the Japanese yen carry trade, which Jones has studied. Japan, worried about deflation in the 19905, had six years of zero-shortterm-interest policy, he notes. "And now, long after that, we're only up half a percentage point on short-term Japanese interest rates," says Jones. "And to some degree, you can argue that even the Japanese carry trade helped keep global long-term yields lower than they otherwise would have been," he says.
"So, there were a whole number of things that did reenforce Greenspan's conundrum argument and, thus, he said, there wasn't just a housing bubble in the U.S. There was a housing bubble in the U.K. And there's a housing bubble that's bursting right now in Spain, maybe even Ireland. So, to some degree, Greenspan had a point here. There was a global dimension to all this as well," Jones says.
Mortgage credit explosion
One can also get a clearer picture of the causes of the bubble by looking closer into growth in mortgage credit and which players led the extraordinary gains in credit expansion. Jones divides the expansion in housing credit into two categories: banks and non-banks. The smaller piece of the credit expansion goes to "the old-fashioned banking system credit expansion potential based on [money] reserves pumped in by the Fed," he says. "Every dollar of reserves pumped in [was] a potential $10 expansion in credit deposits."
This smaller modest circle within the bubble represents the bank expansion in mortgage credit, Jones explains. "However, there is a much larger circle of non-bank balance-sheet lending that represents the bulk of the bubble above and beyond that portion from bank expansion of mortgage credit," he adds.
With securitization, Jones says, "you begin to detach the bank origination of a mortgage loan between a bank and borrower, making an illiquid asset liquid, in effect." The impact of this innovation "is really much more profound than a lot of people give [it] credit for," he says.
By moving loans off the bank balance sheet and trading mortgage-backed securities and derivatives in the market, it separates the "credit judgment on a borrower from the ultimate holder of the mortgage," Jones says. This separation can lead to a breakdown in credit quality, he explains. "So, I guess I would say the securitization process is really a second and critical feature of this housing credit bubble."
The non-bank credit bubble was further expanded by the existence of off-balance-sheet conduits like structured investment vehicles (SIVs) and investment vehicles such as collateralized debt obligations (CDOs), Jones says. "But this non-bank credit bubble was really the key factor, and a huge bubble that expanded," he says.
The innovations in financial structures such as the SIV and the innovations in investment instruments such as CDOs made it possible to expand credit far more from a given capital base than could be done under the banking system, Jones says. He points out that banks had a capital requirement under the Basel I bank regulation agreement, which mandates that banks have a minimum of 6 percent capital in support of risky loans. By pushing the mortgage loans and securities off the balance sheet, it allowed the creation of far more credit than a bank could have done otherwise, Jones contends.
The result of all these financial innovations, Jones explains, is a company like Carlyle Capital, a $21.7 billion fund with less than $1 billion in capital invested entirely in Fannie Mae and Freddie Mac triple-A securities. Carlyle Capital collapsed March 12. The same kind of highly leveraged involvement with mortgage securities and derivates brought down Bear Stearns a few days after the collapse of Carlyle Capital, leading the Fed over the weekend of March 15 and March 16 to engineer the acquisition of Bear Stearns at a deep discount by JPMorgan Chase, a firm with much lower leverage.
The underlying problem for the markets is that the innovations in structures and investment products had never been stress-tested, according to Jones. It was next to impossible to mark the investments to market when so few were trading after the global meltdown in the summer of 2007 and many firms at first marked them to model. The model, unfortunately, is built on an average of historic delinquency and default rates, Jones says.
"With models built on quicksand, and investors hungry for higher bond yields and no effective limits on leverage, there was nothing to hold back the formation of a very big bubble," he concludes.
The originate-to-distribute business model
Fed Chairman Bernanke addressed the question of the "origins of the current turmoil"-as he gently put it-in a May 15 address at the Chicago Fed's annual conference on bank structure and competition. While many factors played a role, Bernanke noted, he identified as the chief culprit the "problematical implementation [of] the originate-to-distribute model" of mortgage finance.
The Fed chairman noted that the originate-to-distribute model "in principle, and indeed often in practice," is a good thing. It "spreads risk and reduces financing costs, offering greater access to capital to a wide range of borrowers while allowing investors greater flexibility in choos-ing and managing credit exposures," he said. Yet, increasingly, the model, as practiced, fell short-"resulting ultimately in a broad retreat from this method of credit extension last summer," Bernanke said.
That was putting it mildly. In fact, as everyone in the mortgage business knows, the privatelabel mortgage-backed securities market collapsed with virtually no new issues of private-label residential mortgage-backed securities (RMBS) since Aug. 9, 2007.
The "problematical implementation" Bernanke described in his address at the Chicago Fed targeted the incentives by originators to ease underwriting in order to keep up volume. Revenues, he said, "were often tied to loan volume rather than to the quality of the underlying credit." This, in turn, "induced some originators to focus on quantity rather than the quality of the loans being passed up the chain."
When house prices stopped rising and began to fall, it exposed this underlying weakness. Bernanke, it seems, was just stating the obvious, although it is undeniably a good thing that he-and presumably the Fed-understand this underlying weakness. At the same time, however, it is interesting to note that Bernanke did not acknowledge the chorus of critics pointing to Fed monetary policy as a leading cause of the housing credit bubble.
Technology and risk pricing
Former Fed governor Gramley identifies as a key cause the dramatic increase in the volume of mortgage credit made available in the middle of the 19905, long before the low interest rates of 2003 and 2004. Why was mortgage credit expanded so broadly? "Technology made risk pricing possible," says Gramley. Plus, he added, there was "federal pressure to serve communities not previously served."
The expansion in mortgage credit led to a dramatic increase in the rates of homeownership, Gramley adds.
"Demand for housing led to an increase in the stock of houses," he explains, leading more home builders to build new homes. While there was a big increase in demand, the supply of new houses to meet the demand grew more slowly. This led to "a change in the underlying balance between demand and supply" that was the origin of the housing bubble, according to Gramley.
He believes mortgage lenders were lulled into a sense of complacency by declining delinquencies and foreclosures in the mid-1990s. While the number of bad loans had risen some, Gramley notes, they were still below the recession levels of 1991. Lenders saw this as validation of their new risk-based pricing technologies. "They said, 'Look, the markets are accepting what we are doing,'" he says.
The good performance of new loans based on risk-based pricing seemingly gave a green light to credit expansion at the same time that the originate-to-distribute model provided a seemingly inexhaustible supply of new credit to the markets. The reliability of the originate-to-distribute model also failed in a fundamental way-severing the consequences of bad credit decisions from people who originated and underwrote the credit quality of new mortgages. The combination of these factors set the stage for the creation of a housing finance bubble.
No one fired a shot and there was no starting line of players, yet it was off to the races for mortgage lenders as most fought hard to gain market share in the midst of runaway credit expansion. Subprime lending became the new frontier for conquest by mortgage lenders eager to tap its potential profits.
The task of tempering the excesses of credit expansion would rest with the willingness of top management at mortgage lenders to balance risk with growth and profit opportunities. Curbing market enthusiasm would also rest on the ability of both government regulatory and private-market gatekeepers to preserve the integrity of the credit expansion. Virtually everyone seemed prepared to believe that the system would protect itself from wretched excess.
The second of this two-part article on the causes of the housing credit bubble will examine several other contributing factors. It will look at the role of evolving business models and patterns of industry competition, the role of credit-rating agencies and mortgage insurance companies, along with federal regulation.)
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Copyright 2008 Mortgage Bankers Association of America. Reprinted With Permission
