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.qxd:ccc_bitner_c05_103_126.qxd 5/29/08 1:43 PM Page 123What the Future Holds 123Insurance and Investments, Eggert discussed how the securitizationprocess works to the detriment of the distressed borrower.Restructuring the loan poses a substantial fiduciary dilemma tothe trustee, because it would almost inevitably involve remov-ing some part of a stream of income from one tranche andadding income to another tranche.This tranche warfare is asignificant brake on the flexibility to restructure a loan.One tranche might hold the right to any principal repaymentsmade during the first year, another to interest payments duringthat year, yet another to interest payments during the secondyear, and so on.In other words, stealing from one tranche to pay another createslegal challenges.Since mortgage-backed securities are broken downinto complex payment streams, any effort to modify a loan wouldlikely benefit one tranche at the expense of another.When trusteesare faced with making such a choice, they open themselves to claimsthey breached their fiduciary duty.In the end, it s often easier for ser-vicers and trustees to avoid using any discretion as a way to sidestepthese disputes.This helps to explain why, according to Moody s In-vestors Service, servicers adjusted only 1 percent of subprime mort-gages that had rates reset during the first six months of 2007.What the Future HoldsThere is little doubt that the housing and mortgage markets are infor a bumpy ride.Although Chapter 7 discusses potential solutions,there are no quick fixes or easy answers.I m concerned that Con-gress will either pass ineffective legislation or the courts will takematters into their own hands.In some cases, it s already starting tohappen.In October 2007, a colleague shared with me his recent experi-ence.He worked for a firm that securitized subprime and nonagency ccc_bitner_103_126_c05.qxd:ccc_bitner_c05_103_126.qxd 5/29/08 1:43 PM Page 124124 Wall Street and the Rating Agencies: Greed at Its Worstmortgages and he participated in a meeting to discuss a lawsuitagainst his firm.What s interesting is how the Holder in Due CourseDoctrine didn t apply because of the special circumstances of thiscase.Here s his story:The borrower originally took a five-year ARM back in 2002.Since the broker and lender were both out of business, shefiled a lawsuit against my firm, the company that securitizedher mortgage.She told the judge she didn t understand whatwould happen to the interest rate when the loan adjusted.Heroriginal interest rate was 4 percent and had gone to 7 percenta few months earlier.Her husband had cancer so the loan hadbecome a hardship.I walk into the judge s chambers with our attorney and thefirst thing the judge says is he understands both sides of thecase.But he wants to know what we re going do to help thiswoman.He expected us to fix the problem and keep it out ofhis courtroom.There are a couple of interesting things about the loan.Tostart, the borrowers both had great credit and income whenthey qualified.She was an A borrower who got a fair deal.Shewas also an intelligent, working professional who signed nu-merous disclosures, just like every other borrower, explainingwhat it meant to have an ARM.This wasn t someone who gotduped.She either didn t read the documents or was just look-ing for a way out.In the five years she had the mortgage, shenever missed a payment.When her husband contracted can-cer and stopped working, she couldn t pay her property taxes,which I think prompted her lawsuit.I didn t think she had a legitimate case against anyone.Butthe judge felt sorry for her and wanted us to fix it to keep itout of his courtroom.We decided it wasn t worth the badpress that would come from fighting a woman whose husbandwas battling cancer.By the time we paid the court costs, herattorney s fees, back taxes and permanently modified her loan ccc_bitner_103_126_c05.qxd:ccc_bitner_c05_103_126.qxd 5/29/08 1:43 PM Page 125What the Future Holds 125to a fixed rate of 6.5%, we spent $100,000 to fix a loan thatwe never made and appeared to be in no way fraudulent ordeceptive.Her whole argument amounted to I didn t understand. When someone who wasn t manipulated and that probablyknew better got this kind of treatment, it opened my eyes.Itmade me wonder what someone with a legitimate grievancecould get. ccc_bitner_103_126_c05.qxd:ccc_bitner_c05_103_126.qxd 5/29/08 1:43 PM Page 126 ccc_bitner_127_150_c06.qxd:ccc_bitner_c06_127_150.qxd 5/29/08 1:44 PM Page 127CHAP TE R6SecondaryContributors:The Fed, Consumers,Retail Lenders,Homebuilders,and Realtors ccc_bitner_127_150_c06.qxd:ccc_bitner_c06_127_150.qxd 5/29/08 1:44 PM Page 128 ccc_bitner_127_150_c06.qxd:ccc_bitner_c06_127_150.qxd 5/29/08 1:44 PM Page 129he preceding chapters show that the collapse of the mortgagemarket was a direct result of several groups acting in a decep-Ttive or fraudulent manner.It took brokers manipulatingloans, lenders financing unqualified borrowers, investment bankssecuritizing risky mortgages, and rating agencies validating these se-curities as investment grade to unleash the perfect storm.In alllikelihood the full impact from this collective effort won t beknown for years to come.However, there are still some pieces of this story that need to betold.We ll start by examining how the secondary participants theFederal Reserve, borrowers, retail lenders, homebuilders, and real-tors contributed to the problem.We ll then review the specificevents and trends that led to the explosive growth and eventual de-mise of the subprime industry.129 ccc_bitner_127_150_c06.qxd:ccc_bitner_c06_127_150.qxd 5/29/08 1:44 PM Page 130130 Secondary ContributorsSecondary Contributors: The Federal ReserveThere s a large contingent who believe that Alan Greenspan andthe Federal Reserve were the primary contributors to the housingand mortgage debacle.For me, discussing the actions of the Fed isnot unlike the conundrum Greenspan talked about in his now-famous2005 speech.The monetary policy employed by the Fed is a main rea-son anyone involved with subprime mortgages, or any form of lendingfor that matter, prospered during the last six years.I discussed the sub-ject with a colleague at an industry conference in 2005, and his com-ments still resonate with me.He said, Greenspan s decision tolower rates changed my life. Since he made more money in theprevious four years than during his entire business career, it s easy tounderstand why.He wasn t alone in his thinking.The Fed s deci-sion to lower the federal funds rate created a windfall the mortgageindustry may never see again.I face two challenges in discussing the role of the Fed.First, toaccuse Greenspan of poor judgment would be hypocritical.The fi-nancial gains my company achieved were a by-product of the Fed sactions.To call him negligent, knowing that I cheered every timenew rate cuts were announced, comes across as disingenuous.Sec-ond, I understand the basic workings of the Fed but economic pol-icy is not my forte.I ve read volumes on the subject, books writtenby some of the smartest economists and policy makers in the coun-try.While many view his tenure at the Fed as nothing short of ge-nius, there are some, like Alan Abelson of Barron s, who take acontrary position
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