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Why do you believe that in the absence of MBS, a failure to properly rate home loans would have let to a different result?

leereeves 10y ago
Not many would lend their own money to someone with no income and no assets. But by bundling many such NINJA loans into complicated investments that few understood, mortgage writers were able to fund these loans with money from most risk averse investors. Would anyone have been fooled by individual NINJA loans with AAA ratings?
- yummyfajitas 10y ago
  We know this to be false; most mortgage issuers did lend their own money for NINJA purposes. The typical practice done by Countrywide and others was to sell off the AAA tranches of MBS and keep the riskiest ones. Would anyone have been fooled by individual NINJA loans with AAA ratings? This question betrays a gross misunderstanding of how mortgage securitization works. It's perfectly legitimate to construct AAA mortgages from arbitrarily bad loans, provided you've accurately quantified how bad they are.
  - leereeves 10y ago
    I didn't say no one would. I said not many - meaning, in particular, not the risk averse investors who control vast sums of other people's money and demand top rated securities. Countrywide was making a profit off the resale of the loans, removing short term profits from the corporation, leading to personal gains even after the scheme failed, and Countrywide's CEO agreed to pay a "$22.5 million penalty to settle SEC charges that he and two other former Countrywide executives misled investors". Countrywide wasn't your typical investor. > This question betrays a gross misunderstanding of how mortgage securitization works. Your comment betrays a misunderstanding of what happened. People were fooled by the complexity. I said nothing about the ability to construct accurately rated loans. The fact is that the MBSs and CDOs did fool many people, including the rating agencies. And you didn't answer the question. How many would be fooled by a simple, individual, AAA rated NINJA loan?
    - yummyfajitas 10y ago
      Countrywide (and other loan issuers) tanked because they were keeping the risky tranches. It was the AAA tranches they sold. That takes all the risks of the underlying loan portfolio and amplifies it. And you didn't answer the question. How many would be fooled by a simple, individual, AAA rated NINJA loan? The question is meaningless. Individual loans aren't rated (at least not on the same C-AAA scale that bond-like instruments are). Portfolios of loans are, as are securitized loans. People were "fooled" by portfolios of loans in the exact same way they were fooled by securitized loans - they chose optimistic parameters for the nightmare scenarios. That's not complexity, that's just guessing wrong about one or two simple numbers.
      - leereeves 10y ago
        Countrywide tanked because they kept the risky tranches for shareholders, not for the people operating the company, who pocketed millions. And when the SEC sued, the CEO agreed to repay investors "$45 million in disgorgement of ill-gotten gains", but reportedly, because of an indemnification agreement, Countrywide the corporation (actually the corporation's new owner BofA) was forced to pay $20 million of that as well. Hard to see that as anything but a scheme to "mislead investors". https://www.sec.gov/news/press/2010/2010-197.htm https://www.sec.gov/news/press/2010/2010-197.htm

leereeves 10y ago

Not many would lend their own money to someone with no income and no assets. But by bundling many such NINJA loans into complicated investments that few understood, mortgage writers were able to fund these loans with money from most risk averse investors. Would anyone have been fooled by individual NINJA loans with AAA ratings?

yummyfajitas 10y ago
We know this to be false; most mortgage issuers did lend their own money for NINJA purposes. The typical practice done by Countrywide and others was to sell off the AAA tranches of MBS and keep the riskiest ones. Would anyone have been fooled by individual NINJA loans with AAA ratings? This question betrays a gross misunderstanding of how mortgage securitization works. It's perfectly legitimate to construct AAA mortgages from arbitrarily bad loans, provided you've accurately quantified how bad they are.
- leereeves 10y ago
  I didn't say no one would. I said not many - meaning, in particular, not the risk averse investors who control vast sums of other people's money and demand top rated securities. Countrywide was making a profit off the resale of the loans, removing short term profits from the corporation, leading to personal gains even after the scheme failed, and Countrywide's CEO agreed to pay a "$22.5 million penalty to settle SEC charges that he and two other former Countrywide executives misled investors". Countrywide wasn't your typical investor. > This question betrays a gross misunderstanding of how mortgage securitization works. Your comment betrays a misunderstanding of what happened. People were fooled by the complexity. I said nothing about the ability to construct accurately rated loans. The fact is that the MBSs and CDOs did fool many people, including the rating agencies. And you didn't answer the question. How many would be fooled by a simple, individual, AAA rated NINJA loan?
  - yummyfajitas 10y ago
    Countrywide (and other loan issuers) tanked because they were keeping the risky tranches. It was the AAA tranches they sold. That takes all the risks of the underlying loan portfolio and amplifies it. And you didn't answer the question. How many would be fooled by a simple, individual, AAA rated NINJA loan? The question is meaningless. Individual loans aren't rated (at least not on the same C-AAA scale that bond-like instruments are). Portfolios of loans are, as are securitized loans. People were "fooled" by portfolios of loans in the exact same way they were fooled by securitized loans - they chose optimistic parameters for the nightmare scenarios. That's not complexity, that's just guessing wrong about one or two simple numbers.
    - leereeves 10y ago
      Countrywide tanked because they kept the risky tranches for shareholders, not for the people operating the company, who pocketed millions. And when the SEC sued, the CEO agreed to repay investors "$45 million in disgorgement of ill-gotten gains", but reportedly, because of an indemnification agreement, Countrywide the corporation (actually the corporation's new owner BofA) was forced to pay $20 million of that as well. Hard to see that as anything but a scheme to "mislead investors". https://www.sec.gov/news/press/2010/2010-197.htm https://www.sec.gov/news/press/2010/2010-197.htm