Other People's Houses by Jennifer S. Taub

Author:Jennifer S. Taub
Language: eng
Format: epub
Publisher: Yale University Press
Published: 2014-01-06T16:00:00+00:00

THE SECOND LINK

The second link of the toxic mortgage supply chain was securitization: the pooling of high-risk mortgages into trusts or other conduits, which issued residential mortgage-backed securities (MBSs), purchased by investors. WaMu was an active part of the securitization link. It sold some of its mortgage loans whole to Wall Street banks, which securitized them, and it also securitized many on its own. The money that investors put into MBSs was used to pay WaMu for the mortgages it placed in the trust. In turn, WaMu used the money to help families finance home purchases or refinancings and to pay the independent brokers and employees who actually met with the borrowers.

This link, the ability of lenders and Wall Street to pool mortgages and sell MBSs without the assistance of Fannie and Freddie, depended on the Secondary Mortgage Market Enhancement Act of 1984 (SMMEA). This law removed the legal barriers that had blocked the development of the private mortgage securities market. Before 1984, Fannie, Freddie, and the Government National Mortgage Association (Ginnie Mae) had more than 95 percent of the MBS market. This law was a major turning point. It made private-label MBSs permissible holdings for a broad range of institutional investors, including national banks and pension funds. But because the residential mortgages sold into these pools did not meet the high GSE standards and there was no GSE guarantee, the law mandated a substitute. Under SMMEA, these “nonagency” MBSs required a top rating from at least one Nationally Recognized Statistical Rating Organization (credit-rating agency). In addition, SMMEA required states to treat private-label MBSs as equivalent to U.S. government obligations for purposes of state laws that would have otherwise prohibited banks and S&Ls from buying. It also preempted state securities laws, so that the private-label MBSs did not have to be registered with them, which would have entailed state-by-state review, disclosures, and sales restrictions.17

Also enabling this securitization link was the Tax Reform Act of 1986, which allowed MBSs to avoid double taxation. The law created the Real Estate Mortgage Investment Conduit (REMIC), another name to describe the trusts and other entities used to pool the mortgages. This allowed for innovation: private-label versions of the vehicles that government agency Ginnie Mae had first used in 1970 for the mortgages it pooled. The Ginnie Mae structure had allowed only for the pass through of mortgage cash flows, divided up proportionately to the certificate holders. With REMICs, cash flows from pooled mortgages could be split up into classes, known as tranches. This allowed one tranche to be prioritized over another, so as to (in theory) concentrate the risk of default with those classes that paid higher interest to investors. It also allowed for new structures that could distribute the cash flows in a variety of ways, such as selling tranches of securities that only received interest payments from the underlying mortgages. Without the tax law change to approve this REMIC structure, there would have been double taxation—at the trust level and to the investors.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.