Mortgage Professionals Did Not Foresee Housing Bust, Economists Say
Browdie, Brian, American Banker
Byline: Brian Browdie
People who worked in the financial industry on the eve of the mortgage meltdown may themselves have believed in the seeming inevitability of rising home prices.
As evidenced by their own home purchases, executives who handled mortgage securitizations showed little awareness of anticipating the subprime crisis and subsequent crash in the housing market, according to a paper published recently by economists Ing-Haw Cheng and Sahil Raina at the University of Michigan and Wei Xiong at Princeton.
The economists, who set out to test the theory that mortgage professionals were aware the housing market was in trouble yet did little to dampen speculation, sampled a group drawn from attendees at the American Securitization Forum's 2006 meeting in Las Vegas.
After screening out attendees who worked for credit card, student loan and other finance companies, the economists came up with a group of 400 investors and issuers who worked as senior and mid-level managers at JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (NYSE:C), Wells Fargo (WFC), Countrywide, Lehman Brothers and other firms that securitized mortgages.
The economists, whose work was first reported in the Wall Street Journal, used a database of public records from Lexis-Nexis to collect data on the houses members of the group owned over roughly two years that preceded the bust that began in 2007. They researchers next set up two control groups: one consisting of equity analysts who did not cover the housing industry and a second made up of lawyers who did not work in real estate law who reflected how people who worked outside the mortgage industry acted during the run-up to the crisis. …