James Schneider  

Did Mortgage-Security Professionals Time the Housing Crash?

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A forthcoming AER paper examines whether professionals in the mortgage securitization industry foresaw the housing crash. If these professionals knew that they were buying and selling toxic assets, they would betray this knowledge by their personal housing decisions. For example, if you thought that the housing market was going to crash, you wouldn't rush out to buy a second home. However, the AER paper shows that securitization professionals were as aggressively invested in the housing market as comparable professionals.

The researchers found their securitization professionals by looking at the attendees of the 2006 American Securitization Forum. These professionals were mostly mid-level managers like vice presidents and managing directors. If the industry knew that a crash was imminent, these people would have been perfectly placed to take advantage of this information when making their personal housing decisions. The researchers compare the housing portfolios of the securitization professionals to those of equity analysts and lawyers. The assumption is that these three groups would be similar except for the fact that the securitization professionals would be better informed about the housing market.

The paper's main findings:

  • Securitization professionals were less likely to divest from housing in every year from 2003-2006 -- the prime "bubble period." They were slightly more likely to divest in 2007-2009 during the bust.
  • Securitization professionals aggressively upgraded to better homes and bought second homes during the bubble period.
  • Southern California's housing market was more "bubbly" than New York's. Securitization professionals were comparatively more aggressive in Southern California than New York.
  • A debtor who foresaw the possibility of a market crash would be less likely to take out a home equity line of credit since lenders have access to non-house assets in the case of default. Foreknowledge of the crash is not demonstrated in differential rates of tapping into home equity.
  • Overall, the housing portfolios of the securitization professionals saw worse returns than those of equity analysts and lawyers.
  • The housing portfolio of employees on the seller-side did worse than those on the buyer-side. This casts doubt on the view that the seller-side of the industry exploited their superior knowledge to dump overvalued securities on less knowledgeable buyers.
  • The housing portfolios of managers from companies that cratered during the crash (like Lehman and Countrywide) did worse than the portfolios of managers from companies that did relatively well (like BB&T and Wells Fargo).

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COMMENTS (3 to date)
John Hall writes:

It seems like they aren't controlling for income or expected income (though I just skimmed it quickly). If the mortgage security professionals are getting raises and bonuses at a faster pace than the controls and expect that to continue, then I wouldn't be surprised if they would buy houses at a faster pace (assuming they all have the same expectations for the growth in home prices).

Steve Sailer writes:

You can't understand the housing bubble without understanding the role played by decades of diversity indoctrination in undermining healthy skepticism as a racist relic of the past. Angelo Mozilo of Countrywide explained over and over to much media approbation that he was getting rich by fighting bigotry, especially against immigrant Hispanic borrowers. He likely believed it, too.


Mike Rulle writes:

Of course they did not know.

Individual workers are simply optimizing for their bonus and P&L---it has nothing to do with real life.

What they did know, was when they ran out of buyers, their firms were still long a lot of unsellables. So they pretended the world was going to end (as they always do during a crisis) if they did not get bailed out. Lo and behold the Government bought the line out of panic and stupidity.

The politics of the presidential election also was the perfect setting for people and politicians to buy into all sorts of garbage demagoguery.

I think this was the only financial crisis which got spider-webbed with a presidential election---and while not causal with the crisis per se---was certainly not helpful in calming it down.

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