In a painstaking forensic analysis of the sources of increased mortgage risk during the 2000s, "The Failure of Models that Predict Failure," Uday Rajan of the University of Michigan, Amit Seru of the University of Chicago and Vikrant Vig of London Business School show that more than half of the mortgage losses that occurred in excess of the rosy forecasts of expected loss at the time of mortgage origination reflected the predictable consequences of low-doc and no-doc lending. In other words, if the mortgage-underwriting standards at Fannie and Freddie circa 2003 had remained in place, nothing like the magnitude of the subprime crisis would have occurred.
Thursday, October 27, 2011
Calomiris on Underwriting Problems
Charles Calomiris taught me Money and Banking in graduate school, and I thought then he was very wise. Here he is in today's WSJ:
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Bring on the Housing Cause Denialists!
There's an online tool called Desktop Underwriter (DU), which you can read about here:
Get your whole evaluation workflow down to 15 minutes.
This tool has become standard across the entire industry, so even the loans that don't go through the FNMA will probably get evaluated with the DU tool anyhow. The lessons from biology are clear, lack of diversity leaves everyone vulnerable to a single (highly correlated) mode of failure.
"if the mortgage-underwriting standards at Fannie and Freddie circa 2003 had remained in place, nothing like the magnitude of the subprime crisis would have occurred."
... doesn't this comment get things precisely the wrong way round? Surely, "In order for the lending spree of the noughties to continue the mortgage underwriting standards had to be removed." is the correct way of stating this?
As always on this subject, "All the Devils Are Here" has the full picture.
All steps except the formation of the trust occur simultaneously. If the issuing company is a bank holding company, it will also usually guarantee the interest and maturity payments on the trust preferred stock.
In exchange, the company issues junior subordinated debt to the trust with essentially the same terms as the trust's preferred stock.
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