This week I attended a seminar at the University of North Carolina at Wilmington on the why and how of the subprime mess and resulting credit market freeze. The panel consisted of Dr. Thomas Simpson, Executive in Residence and former senior official at the Federal Reserve Board and FOMC, Dr. Nivine Richie, Assistant Professor of Finance and former trader of mortgage pass-through securities and collateralized mortgage obligations, and Dr. Edward Graham, Associate Professor of Finance and commercial real estate investor.
It was quite the informative session. Here are a few of the thoughts that went through my mind as I listened to the three presenters:
It is the people who put cash down when purchasing their homes who stand to really lose the most from house value declines. We're talking real economic loss here. While those that lose their homes because of 2/28 adjustable, no money down loans will certainly suffer, at least they aren't out-of-pocket thousands of down payment dollars. Not that this comes as a surprise, but it was interesting to hear.
Rating agencies were as much to blame as anyone in this mess. What I found interesting to ponder is that investors were relying on the agencies to have a clear understanding of what they were rating and insuring, while agencies were relying on the investment banks to convey a clear understanding of what they were packaging. In the end, no one understood what they were packaging, insuring, or investing in. Obviously the insurers have been punished by the markets, but perhaps the punishment was too little too late.
Congress is looking for an election-year victory, and where better to find one than in the depths of the housing mess. The White House is trying to blunt perhaps an overzealous response by congress with its own proposals and actions to prevent future meltdowns (read Bloomberg perspective on Treasury Sec. Paulson's March 26 speech). In any case, look for overly ambitious rhetoric and new, entrenched regulation.
The three presenters really put forth good material, particularly with regard to what some of these investments contained (loans with mismatched payment streams, risk ratings, etc.). I enjoyed the program thoroughly.
