Politics & Money

Mr. Mortgage Banker, tear down this wall!

For those of you old enough to remember, the title of this piece is an adaptation of President Ronald Reagan’s Brandenburg Gate speech in West Berlin, Germany, in which he said “Mr. Gorbachev, tear down this wall!”  The wall in question was the Berlin Wall.  Here is an excerpt, compliments of Wikipedia:

“We welcome change and openness; for we believe that freedom and security go together, that the advance of human liberty can only strengthen the cause of world peace. There is one sign the Soviets can make that would be unmistakable, that would advance dramatically the cause of freedom and peace. General Secretary Gorbachev, if you seek peace, if you seek prosperity for the Soviet Union and Eastern Europe, if you seek liberalization, come here to this gate. Mr. Gorbachev, open this gate. Mr. Gorbachev, Mr. Gorbachev, tear down this wall!”

As the authors of this piece, we are making a similar call to arms with regard to nonagency residential mortgages. For too long, the nonagency market has been held hostage by the Wall Street/Ratings Agency Kleptocracy Complex. How long will people in the mortgage industry wait before the market is started up again? How many times do we have to hear girlie men (great phrase from a former California governor) bemoaning the “unsustainability” of the government’s role in the mortgage business? Last I checked, the government had nothing to do with the nonagency mortgage loan market. Everyday borrowers who want to borrow can’t find loans.

Let us start with the currently accepted wisdom that all significant mortgage securitizations have to go through Wall Street and one or more ratings agencies have to put their rubber stamp on the deal. Set aside for a moment the absurd and insidious deferential treatment the agencies receive via being encoded into investment policies from private to government investment funds.

Now focus on what is happening. We have a situation where Wall Street banks made billions of dollars bundling your mortgages into bonds and selling them at markups to unsuspecting investors. Add in the fact that the ratings agencies are not only culpable in the credit crisis but also continue to hold sway over the return of any viable market for nonagency investments.

Wall Street desperately needs to be in the center of any new nonagency market. They are under the gun from every angle and need the revenue that would come from the return of the market. The ratings agencies are doing what is rational. You would become super conservative, too, if you were made out to be a villain and the Securities and Exchange Commission is crawling through your cupboards looking for rotten analysis.

Step back for a moment. Close your eyes. Envision a market without Wall Street and the ratings agencies. I can hear the protestations: "Wall Street provides liquidity. Wall Street is efficient. The rating agencies only give opinions, not guarantees." That’s all well and good, but honestly, is the market so large that we need these players to actually do deals? There are just as many capable people working outside of Wall Street and the ratings agencies that can easily structure simple, transparent deals. It is not difficult to estimate losses, prepays and so forth. On the flip side, investors can and should do their own due diligence. Subordination levels can be negotiated instead of being handed down by the ratings agency gods.

The nonagency market is so small right now that it is conceivable that deals can be getting done without the overhead charges of Wall Street and the ratings agencies. Why not save the $1 million dollars in deal costs and the give-up in markup by Wall Street and seek out trusted partners and get something done? All markets start small. If deals start getting done, standards will solidify, tolerances will be established, and the ratings agencies will be playing catch up to what works in the market instead of trying to dictate what should work without regard to economics.

Unlike the Cold War, bad guys in the form of the former USSR, the tearing down of the wall preventing nonagency deals from getting done is now the work of the good guys — the mortgage companies who truly give borrowers choice when it comes to mortgage products. So, we implore you to rise up, network, call like- minded firms and start the revolution of tearing down the walls of the Kleptocracy.

Matthew Ostrander is co-founder and CEO of Parkside Lending LLC, in San Francisco, Calif.

Loren Picard is senior managing director of LMA Capital Inc. in Mill Valley, Calif., and an outside director on Parkside Lending’s board.

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