Great piece in Friday’s Times by Floyd Norris on an earlier boom and bust in securitized mortgages: The 1920s and 30s!

“Real estate securitization was one of the great innovations in finance in the last quarter-century. In an unprecedented way, it allowed vast sums of money to go into the real estate market from people who traditionally did not take part in it. But the people making the loans did not need to worry if they would be repaid, and in the end the entire edifice collapsed.

Now, with the securitization market nearly dead, getting that market going again is vital to providing Americans with mortgage loans. Securitization may need to be reformed a little, but it remains critically important to a well-functioning economy.

That is the conventional wisdom now, at least among many bankers and economists.

Most of it is right, except that “unprecedented” part. Although few people now remember it, another wave of private securitizations once altered the real estate landscape, particularly in New York but also in Chicago and some other American cities.

That wave ended pretty much like this one did. . .

The original wave of securitizations took place in the 1920s, when the United States went on the greatest building boom ever. Many investors saw how rapidly real estate prices were rising and wanted in on the action. The builders and brokers were only too happy to oblige.” (emphasis added)

Fascinating stuff!

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Source:
In the Packaging of Loans, a Bust With Precedent
FLOYD NORRIS
NYT, January 28, 2010
http://www.nytimes.com/2010/01/29/business/29norris.html

Category: Derivatives, Real Estate, Really, really bad calls

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12 Responses to “The Original Wave of RE Securitizations”

  1. Jerry 369 says:

    As Spock would say,”Fascinating”…This has been my train of thought all along. I ran out of Clifton N.J. in 2003. I saw this happening in real time all around me. A few years into it,there were a few pundits{taking daily body blows for their opinion}but one guy sold his house and went short the real estate market{renting}waiting to buy his house back cheaper. While being lambasted for his folly at the time,who’s laughing now?

  2. rktbrkr says:

    Another parallel between the great depression and the present for those who doubt The Man of The Year has really fixed things.

    Looks like construction of tall buildings is an excellent indicator of an economic crash, doesn’t it?

    NYC in the late 20′s/30′s and Dubai, China and South Florida now.

    Interesting video of Hugh Hendry wandering around looking at empty buildings in China.

    http://www.investmentpostcards.com/2009/07/29/hugh-hendry-walks-the-streets-of-china/

    Very few signs of life in the new high rises lining the south Florida shores. I asked a realtor there where everybody was and she said they were at the beach and I said “but it’s raining” so she said they were shopping. What she didn’t want to say was most of the units were vacant.

  3. MayorQuimby says:

    ‘cept back then, the gvmt actually stepped in and did something about it. This time, they’re trying to preserve the scams and bs. Until they stop, America is headed nowhere but down.

  4. simply, this, recent, Era is nothing more than: “Economy Ramp n’ Crash2.0″

    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Federal+Reserve+Lender+of+last+Resort+Boom+Bust

    also, note the ‘clusters’, on the left-hand side..

  5. TakBak04 says:

    “This Time it’s Different.” But, it’s a good read…food for thought on some levels one might not be thinking about in these times.

  6. bondjel says:

    This IS a great article but I think the parts you quoted from toward the beginning of the article are not really representative of the main points Norris was getting at.

    “Now, with the securitization market nearly dead, getting that market going again is vital to providing Americans with mortgage loans. Securitization may need to be reformed a little, but it remains critically important to a well-functioning economy.

    That is the conventional wisdom now, at least among many bankers and economists.

    Most of it is right, except that “unprecedented” part.”

    This part makes it sound as tho Norris may be buying “most” of this conventional wisdom, but the rest of the article is much more critical of securitization’s effects than the above quote makes it sound. I recommend reading the whole article and perhaps the research paper it was based upon.

  7. t1dude says:

    There were a few people trying to warn about this sort of thing. Here is Senator Byron Dorgan doing so in 1999: http://americannewsproject.com/node/135

    Unfortunately, like Upton Sinclair said, its very difficult to get a man to understand something when his paycheck depends on his NOT understanding it. So many legislators are indirectly paid by the finance industry that its no wonder that they saw what they wanted to see, instead of seeing the warnings in history.

  8. farmera1 says:

    The biggest single underlying similarity between now and the Great Depression is the TOTAL DEBT (governmental, corporate and personal) vs GDP.

    In the early 1930′s this graph (debt vs GDP) peaked out about 190% and then fell even during WWII. Then in about 1970s this graph started going exponential. Today we are at a record high of about 350% debt to GDP. WE have massive amounts of excessive debt (my definition is debt that can never be repaid) in the this country and the world.

    Deleveraging is a beatch. There is no easy painless way out. Essentially there are only two ways out: 1) Writing off massive amounts of debt and you get a depression ala the GREAT DEPRESSION. 2) Inflate your way out. Time will tell what happens this time with the government doing its best to prevent massive write offs and deleveraging, we’ll see where this merry go round stops.

    Securitization, derivatives, greed, low/negative real interest rates, real estate, war, Greenspan, consumption, negative savings, negative balance of payments are all things that either drove or supported this mountain of debt, but in the end underlying everything was/is a mountain of excessive debt.

    By the way, Greenspan in his 2007 book, AGE OF TURBULENCE said debt was no big thing because obviously other prosperous countries had higher debt to GDP ratios than the US. Not to worry. I was really impressed with that quality of thinking then and as the years go by I’m more and more impressed with his quality of thinking, right.

  9. farmera1 says:

    By the way Greenspan saying not to worry about the massive debts in this country is just one of many dumb things he said in his book. Ayn Rand was his hero and he followed her beliefs right into the FED and managed to help destroy this country IMHO.

  10. roberto says:

    There are other similarities between the Great Depression and the Great Recession such as industrial production, stock markets and volume of world trade.
    http://voxeu.org/index.php?q=node/3421

  11. Michael F says:

    If you want to see how far back securitization ,a huge land bubble and the creative ways they built the hype to suck everyone in go look at the l870’ in the U.S. in the state Kansas. They actually had investors believing they could change the weather patterns. If you would have bought land in the late 1870’s at the top of the hype ,adjusted for inflation, you still would not have your money back. Really!

  12. [...] The Original Wave of RE Securitizations – For those running for the hills or storing truckloads of canned goods in bomb shelters, this post compares the current commentary about getting private buyers back in to the mortgage backed securities market to statements being made back during the Great Depression. [...]