Securitization and the Mortgage Bubble

The evidence points to the likelihood that private sector securitization resulted in an increased issuance of private sector adjustable rate mortgages.(See figures 14, 15 and 17 in the link.) This is all the more remarkable, since the Fed was raising short-term rates from 2004 to 2006 and the interest rate on adjustable rate mortgages was rising. In economic terms, there was apparently a huge increase in demand for adjustable rate mortgages during this time period.

It appears that there was such a huge demand for mortgage paper for banks and the vehicles they were creating to use to go long, that brokers were paid a premium to issue no-income, no-job, no-asset, no-money down loans. No wonder there was an increase in demand for high interest rate mortgages!

Of course if the banks were holding those loans on their balance sheets, you can be pretty sure they would have responded to the rise in interest rates by reducing their issuance of loans (which is what Fannie Mae and Freddie Mac did -- see the Ofheo link above). Ergo the culprit is likely to be private sector securitization.