I’ve watched The Big Short many times now. In fact, I just rewatched it again a couple weeks ago. This video makes some really good points about the 2008 mortgage meltdown in its 7-minute introduction, and draws lines between some dots which I didn’t even realize were left unconnected by the movie.
The big question that this all raises is, “Who?” Someone, somewhere, selling mortgage bonds, had to have realized, “Hey, I’m literally running out of mortgages to bundle into new bonds. I need the banks to start selling more mortgages, but the only way they can do that is to offer mortgages which make no traditional, financial sense.”
As I’ve noted many times on this blog, I’ve watched the housing situation in the Valley for decades, because of the IT/programming angle. Sure, a programmer can make twice the money on the coast, but housing is five to ten times more expensive. I don’t know how it is sustainable, or why it hasn’t collapsed, in the 20 years I’ve been paying attention.
This is where I entered this particular picture. When I started hearing about teaser-rate mortgages that allowed people to get into housing in California that they normally wouldn’t be able to afford, I did the thinking, and came away perplexed. Who would buy a house, predicated on barely being able to afford the teaser rate, knowing that they were either going to have to sell or find a way better job in 2-3 years? It just didn’t make sense to me.
The idea of these ridiculous teaser-rate mortgages had to start with someone. They didn’t make sense from the perspective of the buyer, or the bank, in any traditional sense. But, as this video points out, they made perfect sense if the bank was only interested in writing the mortgage with the intent to sell it into the bond market, where they would no longer care if it went into default.
I bought my first house around 1998. I was already hearing about how banks were selling their mortgages, and I didn’t want that. I wanted to be able to drive across town and talk with the people who held “my paper.” So I bought a mortgage with the old, established, local bank here in town. Imagine my surprise when I got a letter just a week after closing that my mortgage had been sold to a big bank. At least mine was a “real” mortgage, based on sustainable numbers, but it’s easy to see that the craze of bundling mortgages was already well underway, 20 years before the crash.
And then my local bank was gobbled up by some other chain, and has been bought and sold multiple times since. But that’s a rant for another day.
So, now, 14 years after the crash, and watching movies and videos about it all, I finally realize: there was a guy. There had to have been a guy; a guy who had an “aha!” moment. He went to a bank, and talked them into this scheme of selling unsustainable mortgages, purely as cord wood for the inferno raging in the mortgage backed security market. As soon as he did, the bank became complicit. As soon as bond agency started buying these mortgages to bundle into bonds, they became complicit. As soon as they asked the bond rating firms to falsify their ratings, they became complicit. And when the FTC and the SEC didn’t do their jobs to oversee the ratings agencies, they, too, became complicit.
But there was a guy. Who was that guy? I’m just curious. I want to know who he was. How he spread the idea like a virus. How he made out when it all came crashing down. Maybe that’s a known known, but I haven’t heard his name. And it wouldn’t be surprising. I mean, one guy lighting the touch paper to the entire world’s economy? If I were complicit, I wouldn’t want to go around pointing fingers. And if I were the guy, I would surely keep my head down too.