Mortgage Guru Warns:
Risky Mortgages To Trigger Financial Crisis
Dec. 12, 2006 (EIRNS)—As high-risk mortgages go into default, the danger of a financial crisis is increasing, bankers and Federal officials warned at the National Housing Forum yesterday.
Wall Street guru Lewis Ranieri, who "invented" the market for mortgage-backed securities (MBS) in the 1990s, now says that banks and mortgage-brokers are passing $600 billion a year in risky mortgages to unwary investors, and that this could result in a financial crisis which is too big for the Fed to control.
Banking regulators said that major banks are selling questionable mortgages, that they themselves cannot legally hold in their own portfolios, to unwary investors. The risk is even higher when brokers repackage the mortgages in deceptive ways, and sell them to small investors and foreigners who don't understand the risks, Ranieri said, while pointing out that the efforts of regulators to limit risking loans hasn't stopped the practice. He said brokers are bypassing the MBS market and bundling the riskiest mortgages together as "collateralized debt obligations" on the corporate/junk-bond market.
But Rep. Barney Frank (D-Mass.) says there is no need for legislation to prevent a financial meltdown, saying lower housing prices are a good thing, and that "if a few speculators get burned, that's just icing on the cake."