I've read two good pieces on the subprime crisis this week:
1) Gary Gorton's "The Panic of 2007" provides detailed statistics on the mortgage market and a nice (albeit technical) description of how the mortgages were securitized. He documents the incredible increase in subprime and Alt-A mortgages (going from 3% and 1% of the MBS in market in 2001 to 12% and 13% in 2006). And the increasing securitization of mortgages (50% of subprime mortgages were securitized in 2001- this grew to 80% in 2006). While Gorton certainly isn't making this point, you could see how that in real time, someone stuck in an office in New York or DC would be very excited about these new ways to package debt and the increasing ease with which people could buy a home. Think of Greenspan's quote from 2005;
2) "The End", by Michael Lewis, is also about the mortgage market but is more a story of the characters behind it. I particularly liked Lewis' description of the work Steve Eisman and his colleagues put in to see what was going wrong. They saw the numbers that Gorton presents, and thought something must be out of whack, but at first they weren't exactly sure why these things were happening. To reaffirm what they were seeking in the data, they made visits to South Florida (to see the housing bubble first hand) and talked with those who were securitizing mortgages. Both highlighted the insufficient regard for the risks being taken. Although Lewis doesn't explain exactly why things went so wrong, he'll make you wish you were in the trenches trying to figure it out back in 2005-2007.
1) Gary Gorton's "The Panic of 2007" provides detailed statistics on the mortgage market and a nice (albeit technical) description of how the mortgages were securitized. He documents the incredible increase in subprime and Alt-A mortgages (going from 3% and 1% of the MBS in market in 2001 to 12% and 13% in 2006). And the increasing securitization of mortgages (50% of subprime mortgages were securitized in 2001- this grew to 80% in 2006). While Gorton certainly isn't making this point, you could see how that in real time, someone stuck in an office in New York or DC would be very excited about these new ways to package debt and the increasing ease with which people could buy a home. Think of Greenspan's quote from 2005;
"Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country ... With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers."
2) "The End", by Michael Lewis, is also about the mortgage market but is more a story of the characters behind it. I particularly liked Lewis' description of the work Steve Eisman and his colleagues put in to see what was going wrong. They saw the numbers that Gorton presents, and thought something must be out of whack, but at first they weren't exactly sure why these things were happening. To reaffirm what they were seeking in the data, they made visits to South Florida (to see the housing bubble first hand) and talked with those who were securitizing mortgages. Both highlighted the insufficient regard for the risks being taken. Although Lewis doesn't explain exactly why things went so wrong, he'll make you wish you were in the trenches trying to figure it out back in 2005-2007.
