Subprime Time

I found this graphic here.

What is interesting about this graphic is that the states with the highest use of so-called "affordability products" also have the lowest home ownership rates. Furthermore, according to the article, home ownership rates are not significantly different from those of the mid-1960s (before the securitization of mortgages came into existence). So it would appear that the securitization of mortgages has little benefited the home owner but has benefited Wall Street (except for the fact that by being highly liquid securitized mortgages sow the seeds of their own panics and crashes).

Thanks to a reader for sending me the graphic.

Some choice quotes:

In the golden age of American home buying — the years after World War II — savings-and-loan institutions or government agencies supplied returning G.I.’s with fixed 30-year mortgages. Home prices appreciated, steadily but at modest rates, and lending fiascoes were rare.

The world began to change in the late 1970s, when Salomon Brothers, in the person of a banker named Lewis Ranieri, pioneered the mortgage security. This showed a flash of genius. Even though each unit of real estate continued to be a slow-moving, illiquid asset, Ranieri perceived that the underlying mortgages could be traded as rapidly as stocks and bonds.

Salomon and other institutions would take the mortgages sold by banks and stitch together bonds backed by the payments of many mortgagees, which they sold to investors. Voilà! Ranieri had knitted a group of inert mortgages into a tradable security. The mortgage market thus obtained liquidity, which, according to Wall Street, made mortgages cheaper and benefited us all.

The [resulting] distancing of the borrower from the lender has contributed to the development of lax underwriting standards... investors in the securities, being remote from the actual real estate, could hardly be expected to scrutinize the underlying mortgages loan by loan. Most delegated the task to ratings agencies, and in time the agencies, intoxicated by the booming market, also grew lax. Meanwhile, Wall Street, sensing the appetite of investors, devised exotic ways of repackaging mortgages.

What happened over the last generation is that housing was turned from a market that responded to consumers to one largely driven by investors. Liberal mortgage financing pushed home prices higher — and younger, first-time buyers were effectively priced out of the market. Rates of homeownership are scarcely any higher than in the mid-1960s.

It was John Maynard Keynes who observed the paradox of securities markets: their very liquidity, which investors perceive as a safeguard, creates the conditions for disaster. “Each individual investor flatters himself that his commitment is ‘liquid,’ ” Keynes wrote, and the belief that he can exit the market at will “calms his nerves and makes him much more willing to run a risk.” The catch is that investors, collectively, can never exit in unison. Whenever they try, panic and losses are the sure result. Once, you had to be a hedge-fund player to experience such a trauma. Now, thanks to the dubious wonders of financial engineering, home buyers are exposed to the very same risks.