About the Book
Discover the Four Vital Decades That Defined U.S. Mortgage Securitization
When Congress created Ginnie Mae through the Housing and Urban Development Act of 1968, it ushered in the first mortgage-backed security, an innovation that expanded access to homeownership nationwide. What followed was a dynamic journey through shifting economic and social forces as the architects of securitization labored to perfect the machinery by which the local mortgage market could go national—but not without profound trials.
In The Evolution of U.S. Mortgage Securities 1970–2010: Four Decades of Innovation, fintech entrepreneur Michael Youngblood applies his extensive experience in U.S. housing and mortgage markets to supply an essential history of the forty critical years when residential mortgage securitization underwent a heated laboratory of creativity. Through exhaustive research and detailed accounts, Youngblood illustrates how fragmented, local lending evolved into a vast, open marketplace by solving concrete problems: standardizing loans, spreading risk, and equalizing credit access. Beginning with FHA insurance and the first Ginnie Mae pass-through, Youngblood charts the build-out of agency programs, non-agency conduits, and multiclass CMOs/REMICs, showing how each product tackled funding mismatches, prepayment, and credit risk.
Part celebration of human ingenuity, part warning about the danger of forgetting hard lessons, Youngblood’s history help us understand how future crises in mortgage lending may be averted through an honest examination of its origins and innovations, and a lasting dedication to the promise of home ownership across America.
Contents
Explore the sections below to learn what materials are covered in The Evolution of U.S. Mortgage Securities.
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An Efficient Market That Evolved To Solve Real Problems
The Importance of History and Learning How Not to Repeat It
The Evolution of the Market . . . and Why It Evolved
Why I Wrote This Book
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The Highlights
The Full Story
Debentures: The First Mortgage Securities
Why Debentures?
Debenture Pros and Cons
The Downfall of Debentures
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The Highlights
The Full Story
The Need to Impose Order on Chaos
Founding the FHA
The First FHA Loans and Why They Mattered
The Secondary Market in FHA-Insured Mortgage Loans
The Birth of Fannie Mae
Fannie Mae’s New Mission . . . and Why It Failed
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The Highlights
The Full Story
The Emergence of Mortgage Securities
The Beginnings of the Fannie Mae Free Market System
The Ginnie Mae Pass-Through Certificate: The Template for All Future Mortgage Securities
Evaluating the Performance of Ginnie Maes: The Twelve-Year Average Life Convention
The Birth of Freddie Mac
The First Freddie Mac Securities: PCs and GMCs
The Asset and Liability Mismatch of Thrift Institutions
The Evolution of the Secondary Mortgage Market
Shorter Assets
Variable-Rate Mortgages (VRMs)
The Eleventh FHLB District Cost of Funds Index (COFI) and the Effort to Popularize VRMs
Expanding Access to Homeownership: Graduated Payment Mortgages (GPMs)
Longer Liabilities: Non-Agency Mortgage-Backed Securities
The First Mortgage-Backed Bonds (MBBs)
MBBs vs. Old-Style Debentures
The First Non-Agency Pass-Through Securities
Securitization and Its Innovations
The Lingering Defects of Non-Agency Pass-Through Securities
The Evolution of Non-Agency Pass-Through Securities
Leon T. Kendall: The Father of the Mortgage Conduit
The Emergence of Ginnie Mae GPM Securities
The Birth of Gordies
The Mortgage Market at the End of the 1970s
Innovations in Financial Economics
Duration
Prepayment and Default Modeling
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The Highlights
The Full Story
Innovation and Turmoil: New Laws and Their Effects
The Rise of Creative Mortgage Finance
Mortgage Lenders Embrace ARMs
The Success of Guarantor PCs
Payment Delays on Pass-Through Securities
Bulk Issuance of PCs and MBS
Block Trades to Securitize and Sell Mortgage Loans
The Development of Cash Flow Bonds
A New Generation of Conduits
The Birth and Growth of Collateralized Mortgage Obligations (CMOs)
The Introduction of GNMA II
Innovations in CMOs:
The Z Class
Discount Collateral
Two Z Classes
The Sears Regulations and the Difficult Birth of Single-Taxed Multiclass CMOs
Ginnie Mae’s ARMs
Freddie Mac and the Gnomes
MBB Redux: Eurodollar Floating-Rate Notes (FRNs)
The Secondary Mortgage Market Enhancement Act of 1984 (SMMEA)
The Public Securities Association (PSA) and Its New Prepayment Benchmark for CMOs
1986: Annus Mirabilis
The Emergence of the CMO Equity
The Introduction of Stripped Mortgage-Backed Securities (SMBS)
Ioettes: Interest-Only Securities
SMBS vs. Ioettes
The Emergence of Senior/Subordinated MBS
The First Planned Amortization Class (PAC)
Evolving Varieties of PACs
The Birth and Rapid Rise of Floating-Rate Class CMOs
The Tax Reform Act of 1986: The REMIC Arrives
The Inverse Floating-Rate Class: A Solution to Problems of the Floating-Rate Class
The Deep-Discount Class: Another Solution
Simultaneous Payment: An Advantage of the Deep-Discount Class
The First Prepayment Wave: 1986–1987
Prepayment Waves: The Achilles’ Heel of Securitization
MBBs Redux: TERMS and the Solution to Massive Overcollateralization
The Birth of Floating-Rate REMICs
The First Super PO
The First Super Floating-Rate Class
The First Accretion Directed (AD) Class
Recombinant Agency Mortgage Securities: Another Solution to Prepayment Problems
The First Targeted Amortization Class (TAC)
Option-Adjusted Spread: A New Performance Measure
The First Second-Mortgage Securities
Non-Agency
Agency
The First Indexed PACs
The Birth of Jump Z Classes
The Very Accurately Defined Maturity (VADM) Class
The S&L Crisis and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
Reverse Mortgage Loans: Home Equity Conversion Mortgage Loans (HECMs)
Upgrades to BOA’s Ratings
Innovation in Senior/Subordinated MBS
Two Experiments in Underwriting: Citigroup and Guardian
Citigroup: “Unsafe and Unsound”
Low Doc Mortgage Loans
Guardian: “We Give People a Second Chance.”
The Mortgage Market in 1989
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The Highlights
The Full Story
The Rise of the Gold PC
The Return of the Balloon Mortgage Loan
The New Mortgage Utilities
The Rise to Prominence of the Resolution Trust Corporation (RTC)
The Guardian Story and Its Sequel
The Birth of Relocation Securities
A New Generation of Conduits
Residential Funding Corporation (RFC)
Countrywide Financial Corporation (CFC)
IndyMac
The Introduction of Modifiable and Combinable Securities (MACS)
The Original FIRST CLASSsm Certificates
The Tiered Index Bond (TIB): A New Inverse Floating-Rate Class Variant
The Standard Default Assumption (SDA): Promoting Consistent Measurement of Mortgage Credit Performance
The Index Differential Class (IDC): Another Inverse Floating-Rate Class Variant
The Emergence of HELOC Securities
Three Pioneers of Subprime Mortgage Lending
Lenders Embrace Subprime Borrowers
The Development of Subprime Underwriting
The Meteoric Rise of Subprime Issuance
EquiCredit Corporation of America (EQCC): A Prime Example of Subprime Mortgage Lending
Credit Cures: Subprime Borrowers Improve Their Credit and Refinance at Lower Rates
The Prepayment Wave of 1993–1995
Net Interest Margin Securities (NIMs): Diversified but Volatile
GNMA REMICs and Platinum Securities: Ginnie Mae Enters the REMIC Era
High-LTV Lending: Proceed with Caution!
FirstPlus Financial Group: An Exemplar of High-LTV Lending
FirstPlus’ Underwriting of High-LTV Loans
Credit Performance of Non-Agency Mortgage Securities
The First Pass-Through (PT) Class in Multiclass Securities: A Surprising Success
The Available Funds Floating-Rate (AFF) Class: A Definitive Solution to the Floating-Rate Problem
The First Agency Whole-Loan REMICs
Alt-A: A Program for A-Grade Borrowers with Nonstandard Loans
Prospectus Prepayment Conventions (PPCs): Security-Specific Prepayment Ramps
Alt-A Securities Begin to Increase Risk in Subprime Securities
Competition for Alt-A Market Share: RFC Remains Dominant
The Introduction of Credit Scores: A Rocky Start for a New Utility
Mortgage Scores: Son of Credit Scores
The Slow Evolution of Credit and Mortgage Scores
Agency-Wrapped Subprime Mortgage Securities
Ruthless Default or The Importance of Solvency?
1996: Another Year of Innovations
The First Modifiable and Combinable REMIC Certificates (MACRs)
The First Callable MACRs
The First Nonaccelerating Senior (NAS) Class
The First Super NAS: A Failed NAS Revival
The “Reduced Rate Option”: The Revival of Prepayment-Protected Mortgage Loans and Securities
MIC’s Data Gathering: The First Effort to Understand Subprime Loan Performance
The Prepayment Wave of 1997–1999
Prime, Alt-A, and Subprime Prepayments
Updates to Credit Performance: S&P Says Protection against Losses Is Sufficient
MODERNs: The First Credit Risk Transfer (CRT) Securities
The Russian Crisis of 1998: A Catastrophe for Subprime Mortgage Securities
Collateral Damage: The Extinction of Specialized Mortgage Lenders
FirstPlus: An Example of Why Lenders Failed
Lessons Learned from Failure . . . or Not
IndyMac: An Example of How the Conduits Survived
The Last Innovation: The Turbo Class
The Mortgage Market in 1999: “Brilliant” but Losing Its Innovative Edge
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The Highlights
The Full Story
NIMs Revived
Lender-Paid Mortgage Insurance (LPMI): A Cost-Effective Form of Credit Enhancement
Conduits Redux: The Rebirth of the Non-Agency Mortgage Market
The Ascent of WaMu: Dominance through Acquisition
Option ARMs
Hybrid ARMs
MTA: A Novel Index for a New Century
WaMu 2002-AR1: An Example of Hybrid ARM Securitization
The First Government-Sponsored Housing Enterprise (GSE) Classes of Non-Agency Securities
The Demise of EQCC: BAC Management Gives Up on Subprime Lending
Basel II and the Rating Agencies
The Prepayment Waves of 2001–2003: Falling Rates Trigger Serial Refinancing
Burnout: Some Securities Miss the Wave
Brilliant Performance: S&P Celebrates the Prepayment Wave
Refinements of Sequential Classes
Carried Away on a Wave of Euphoria: S&P Describes the Three-Pack
The Six-Pack Replaces the Three-Pack
Triplets: Children of the Six-Pack
Emanuel J. Friedman and the Birth of Hybrid Mortgage REITs
Saxon Capital Inc.: The First Hybrid Mortgage REIT
A New Generation of Specialty Finance Companies . . . with the Same Old Problem
The Market in 2005: A Complex Equilibrium
The First Sign of Trouble: Negative Amortization Explodes
The Unseen Hand
The ABX Index: A Way to “Short” the Subprime Mortgage Securities Market
Subprime Securities and the ABX: Cracks Appear in the Façade
Quo Vadis?
Covered Bonds: One Last Innovation That Failed to Catch On
The Year 2006: Riskier Borrowers and the End of Equilibrium
January‒June 2007: The Securitization Crisis Begins
A “Major, Major Issue”: New Subprime Borrowers Stop Making Payments
Red Flags and Rosy Projections: Ratings Agencies and Regulators Try to Respond
Prelude to Recession: The Labor Markets Sink
Housing Prices Fall . . . and the Media Frenzy Begins
Vandell and Riddiough Validated: Falling House Prices + Rising Unemployment = Defaults
Brother, Can You Spare a Mortgage Payment? Subprime Defaults and Delinquencies Soar
Desperately Seeking Alternatives to Foreclosure
An Indelible Stain on Capitalism: Hedge Funds Try to Sabotage Loan Modification
Falling Dominoes: Subprime Lenders Fail
Early Warnings: Ratings Agencies Predict Tough Times
Congress Demands Answers
The Spillover Effect: Interconnected Markets Raise Fears of Global Contagion
The Securities Industry Embraces Loan Modifications . . . and Hedge Funds Fail
“You Were Wooed, Mr. Moody’s”: Market Participants Lose Faith in the Ratings Agencies
July‒September 2007: The Crisis Spreads around the World
A Week of Mass Downgrades: The Ratings Agencies Finally Take Action
A Week of Record Spreads: Downgraded Subprime RMBS Drop in Value
Confidence Begins to Collapse
“Unprecedented Disruptions”: Liquidity Dries Up
The Turning Point: Interbank Lending Shuts Down
“Broad Market Distress”: Non-Agency Issuance Collapses
October‒December 2007: A “Downgrade Frenzy”
The Term Auction Facility (TAF): The Fed Becomes “the World’s Lender of Last Resort”
“Streamlined” Foreclosure Avoidance: The ASF Normalizes Bulk Subprime Loan Modification
ABX and Cash: Public Companies Start Using ABX to Determine the Value of Subprime MBS
The Year 2007: Annus Horribilis
January‒March 2008
The Last Innovation: Resecuritization
“A Very Critical Juncture”: Mounting Losses Stoke Fears of a Major Recession
The St. Valentine’s Day Massacre: Top-Quality Alt-A Securities Begin to Collapse
“Confidence Can Vanish in a Heartbeat”: The Sudden Death of Bear Sterns
“We Hoped to Thaw the Frozen Markets”: The Fed Tries to Revive Liquidity
The Term Securities Lending Facility (TSLF)
The Primary Dealer Credit Facility (PDCF)
April‒June 2008
The “Adverse Dynamic Margin-Spiral-Downward-Self-Feeding Thing”: The Fed Tries to Get a Handle on the Situation
“It Really Hasn’t Gotten Better”: The Fed Tries and Fails to Stop the Collapse
July‒December 2008
Giants Fall and the Fed Runs Out of Room
Mopping Up and Assessing the Damage
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The Highlights
The Full Story
Rebirth: RMBS 2.0
Full Circle