Warnings Aplenty From the 'Father' of Securitization

In his first television interview ever, Lew Ranieri did not disappoint. In a candid interview, the "father" of the mortgage-backed security offered important insights on the state of the housing market and the market for securitized commercial mortgages, while also proving willing to accept criticism of the industry he helped to create.

(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.")

Lewis Ranieri
Lewis Ranieri

Ranieri’s comments on the residential housing market, particularly with regard to a lack of credit, were notable:

“I do not believe people realize how tight credit is…in the banking system but, frankly more importantly, from the agencies themselves…from Fannie and Freddie and even FHA [Federal Housing Administration]. To give you an example, if you take Fannie, Freddie, FHA, VA, and the rural housing authority—that’s the housing market. In 2010, they granted less credit than FHA did in 1999. I mean it’s just amazing.”

And it’s not just credit. Ranieri is also concerned about foreclosures. Unleashing the full extent of foreclosures on the system, he warned, will be a bad thing for the housing market and even worse for the country.

“If we go from 1.2 to 2.5 million foreclosures, the system will come apart at the seams. Putting that many people out of their houses, causing that kind of destruction…because remember, we have hundreds of thousands of vacant houses…a vacant house is a virus in the neighborhood, the house degenerates, it’s not like office buildings.”

Ranieri also had a warning for buyers in the recently resuscitated commercial mortgage-backed security market. Memories are short on Wall Street and given the rapid decline in underwriting standards Ranieri says he’s seen in CMBS (commercial mortgage-backed securities), the market is showing signs of frothiness not seen since the heady days in 2007 before it all imploded:

“If you look at some of the latest deals, so much of it is hospitality, which is one of the most volatile property types, and one of the most dangerous. And when you look at the ratings coming out of the rating services given the nature of the property types and then look at the pricing, at a risk adjusted basis its sort of like exactly back to where we were.”

Words of warning from a man who create the market for securitized mortgage products.

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