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Global investors bought the mortgage crisis Original Source Link: (May no longer be active)
http://www.thisamericanlife.org/Radio_Episode.aspx?episode=355"From our standpoint there is a guy out there with a lot of money and we have to become his sole provider of mortgage bonds to fill his appetite. And his appetite is massive."
http://www.thisamericanlife.org/Radio_Episode.aspx?episode=355
355: The Giant Pool of Money
05.09.2008
A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.
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13:18
Mr. FRANCIS: My name is Mike Francis. During the beginning of the mortgage implosion I was an employee, executive director of Morgan Stanley on the residential mortgage trading desk.
HOST: Michael is one link in the chain that connected the global pool of money to its new favorite investment. Residential mortgages the US housing market and guys like Clarence me. Attractive mortgage loan is to that seventy trillion dollar pool of money. Remember they're desperate to get any kind of interest return they want to beat that miserable 1% interest Greenspan offering them. And here are these homeowners paying 5%, 9% to borrow money from some bank. So what if the global pool can get in on that action.
There are problems individual mortgages are too big a hassle for the global pool of money. They don't want to get mixed up with actually people and their catastrophic health problems and their divorces and all the reasons that might stop them from paying their mortgage. So what Mike and his peers on Wall Street did was to figure out a way to give the global pool of money all the benefits basically higher yield, without all the hassle and risk.
So picture the whole chain, you have Clarence; he gets the mortgage from a broker. The broker sells the mortgage to small bank. The small bank sells the mortgage to a guy like Mike at a big investment firm on Wall Street.
Then Mike takes a few thousand mortgages he's bought this way. He puts them in one big pile. Now he has thousands of mortgage checks coming to him every month; its a huge monthly stream of money, which is expected to come in for the next 30 years, the life of a mortgage. And he then sells shares of that monthly income to investors. Those shares are called mortgage backed securities. And the seventy trillion dollar global pool of money loved them.
15:11
Mr. FRANCIS: It was unbelievable. We almost couldn't produce enough to keep the appetite of our investors happy. More people wanted bonds than we could actually produce. That was our difficult task, was trying to produce enough. They would call and say, we are looking for more fixed rate, what have you got? Do you have anything coming? What’s going on? Tell us what you are trying to do? From our standpoint there is a guy out there with a lot of money and we have to become his sole provider of mortgage bonds to fill his appetite. And his appetite's massive.
HOST: The problem was to make a mortgage backed security, you needed mortgages. Lots of them. So for Mike Francis to satisfy this demand, and to take his quite hefty fee from the global pool of money, he needed to buy up as many mortgages as possible. And to do that he called a guy one link below him on this mortgage backed security chain. A guy named Mike Gardner, who worked at the largest private mortgage bank in Nevada, called Silver State Mortgage. And do give you a sense of how fast this business was growing, Mike Gardner got into the mortgage business from straight from his previous job, as a bartender.
16:33
Mr. GARDNER: One of my regulars, he actually hired me from the bar. He just said he needed some guys, and if I was interested in working for him. And then we started talking about how much I made. He beat what I was making. I didn't know anything about the mortgage business. I was as green as you could be.
HOST: Mike Gardner's job, the guy in Nevada was to buy up individual mortgages, mainly from brokers, bundle two or three hundred of them together, and then sell them up the chain to Wall Street to guys like Mike Francis....
And in the beginning, he [Gardner] would only buy mortgages that were pretty standard, and pretty safe. Mortgages where people would come up with the down payment, and proven that they had steady income and money in the bank. And they sold so many of these mortgages that there came a point in 2003 where just about anybody who wanted a mortgage and who qualified to get one, had gotten one. But the pool of money just had gotten started. They wanted more mortgage backed securities. So Wall Street had to find more people to take out mortgages. Which meant lending to people who never would have qualified before. And so Mike Gardner in Nevada noticed that every month guidelines were getting a little loser.
Something called Stated Income Verified Asset Loan came out. Which meant people didn't have to provide a paycheck stub or W2 form to get a loan as they had in the past. They could simply state their income as long as they showed they had money in the bank.
Mr. GARDNER: The next guideline lower is Stated Income Stated Assets. That came out. So then that came out.... Then the next one came along, that was No Income Verified Assets. So you don't have to tell the people what you do for a living, you don't have to tell the people what you do for work. All you have to do is state you have a certain amount of money in your bank account. And then next one came along was No Income No Assets. So you don't have to state anything. You just had to have a credit score and a pulse...
19:47
HOST: Interesting fact here. Mike Gardner's bank did not care how risky these mortgages were. This was a new era. Banks did not have to hold on to these mortgages for 30 years.
Then they sold them onto Wall Street. And they sold them onto the global pool of money.
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