Mortgage-Backed Securities Will 'Reemerge': Lew Ranieri


The residential mortgage-backed security market will reemerge beyond Fannie Mae and Freddie Mac, Lewis Ranieri, the "father" of the trillion-dollar mortgage market, told CNBC on Wednesday.

Lewis Ranieri

Lew Ranieri is known as the "father of securitization" because he helped invent the securitized mortgage in 1977 while working for Salomon Brothers. He's even been credited with inventing the word "securitization."

"We have to, especially if you look at the Treasury plan, the three alternatives to the Fannie, Freddie and FHA [Federal Housing Administration] are bank portfolios, which is why we created the mortgage security in the first place, 'cause it can't fund housing on a balance sheet because it requires too much equity—you can do some, but you can't do most," Ranieri said.

He continued, "Covered bonds, which really don't work for our type of mortgage in this country, 30-year loans. And the alternative is some form of a securitization, if not Fannie, Freddie, it's got to be a RMBS, we just have to do it better this time."

The housing market is very fragile and that is really a function of the overhang, Ranieri said, "We have something like 23 months inventory—that's three times the normal and it continues to grow."

"I do not believe people realize how tight credit is from the banking system, but frankly from from the agencies themselves—from Fannie, Freddie and even FHA," he added.

Lewis Ranieri Sets Record Straight

"The government has to make a decision that all be it we want to transition to a more public market, a non-government market," Ranieri said, adding, "In the meantime if you have the only source of current credit being the government, tight, like this, you just keep the overhang going, prices go down, more people become under water—it becomes a vicious circle."

The core problems are still there, despite all the good new regulations and rules, Ranieri said.

"Until the people in the chain have responsibility and will be held to those responsibilities, just like we are when we sell stocks, you won't fix this," he added.

Looking back at the mortgage market, the housing crisis and the recession, Ranieri said, "Starting in late 2002, the RMBS market starts to experiment with structures, not the  traditional structures—what they call affordability products—and they started experimenting with traditions for underwriting appraisals. As a result...RMBS grows almost overnight to be bigger than Fannie, Freddie and Ginnie Mae together."

"It goes from being 5 percent of the market to basically representing more than anything else," added Ranieri.

"The moral hazard for Fannie and Freddie was always there, he said, "it was talked about in the '80s and then again in the 90s. But this was the moral hazard come to a fore. Wall Street helped a lot. Wall Street could not have done it on its own however without a lot of people."

“In the end Fannie and Freddie buy $500 million dollars of the AAA pieces that we are talking about, if they did not—they capitulated in a strange way, not to anyway at all lesson our fall— but if they did not buy the triple we could never have propelled that peak that we actually got too,” added Ranieri.

“An RMBS generally works backwards off the support tranche because unless you can sell the support tranche you can’t structure the rest of the deal," he said.

“The CDO [collateralized debt obligation] was the final straw, much less the synthetic CDO, because the check and balance in the system, was in one sense the rating service but the ultimate check was the coordinated tranche buyers who were historically very sophisticated investors because they had to make the decision," Ranieri said.

Should Fannie & Freddie Be Demolished?

"Once the CDO came along the traditional support tranche buyers were basically taken out of the picture because there traditional role was now put in CDOs and the amount of due diligence, the amount disclosure, the ability to underwrite backwards ... you had no idea what you were buying and it was sold away from the historical guys," he added.

"So many of us," Ranieri noted, "view that as the final straw, once that came into being, the last check and balance in the RMBS system went away and the rest is unfortunately history."

"As to my role, I being one of the founders, it's my problem ... I bare the burden," he concluded.

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