PERSON OF THE WEEK: Charles R. Geisst And The MBS Dilemma

This column marks the debut of MortgageOrb's new feature, Person of the Week. Each Tuesday, MortgageOrb will call on a leading expert connected to the real estate finance industry for commentary, advice and/or criticism relating to the issues, events and personalities that shape our market.

This week, the focus is on mortgage-backed securities (MBS) – particularly those laced with subprime funds. Recent news of problems relating to these securities has created additional turmoil within the secondary market, with a number of highly publicized news stories adding the proverbial fuel to the industry's none-too-well-controlled fires.

For an understanding of what is transpiring, MortgageOrb called on Dr. Charles R. Geisst, a professor of finance in the School of Business at Manhattan College in New York and author of the acclaimed books ‘Wall Street: A History: From Its Beginnings to the Fall of Enron’ (Oxford University Press, 2004) and ‘Wheels of Fortune: The History of Speculation from Scandal to Respectability’ (John Wiley & Sons, 2002). Geisst has also been widely quoted on financial and institutional investor issues in the New York Times and on CNBC and Bloomberg Television.

Q: In late November, several local governments and school districts in Florida pulled $8 billion from a state-run investment fund, citing their apprehension that the funds were backed by subprime mortgages. Do you see this as an aberration, or will other local governments and school districts around the country follow the same course of action?

Geisst: I don't know whether other municipal districts will pull funds out of their state-run investments, but the past would suggest that other state funds will encounter similar problems with the investments since buying short and long paper backed by subprimes has been very common.

Since outstanding U.S. mortgages literally doubled in value after 2001, it is fair to assume that many were securitized subprimes and that they were sold to investors around the country.

Q: Also from late November, the Securities Industry and Financial Markets Association reported that $476.6 billion in mortgage loans were bundled and sold as securities during the third quarter, down 23% from the previous quarter. And do you see this as an aberration or a preview of things to come?

Geisst: Yes, securitization will slow on all but the best types of collateral. But it is so well-established that it will be back in force in the future.

Q: On Nov. 8, the British bank HSBC Holdings PLC announced it stopped all MBS sales and trading in the U.S., based on the subprime crisis. Do you predict other banks will also stop their MBS sales in the near future?

Geisst: Yes, they will withdraw in the same way that many banks withdrew from the junk market 17 years ago in the wake of the problems there.

Q: There is growing pessimism about the state of the economy as a whole and the mortgage banking industry in particular. What can be done to bring back confidence in the state of economic affairs?

Geisst: When public confidence in financial institutions wanes, legislation is needed to remedy the problem. In this case especially, many people apparently no longer trust most Wall Street bankers, with good reason. The public sees the financial sector getting rich by picking off the bones of the ‘real’ economy.

Q: How do you see the health and viability of the government-sponsored enterprises (GSEs) in 2008? And how can the GSEs help the mortgage banking industry in the coming year?

Geisst: The GSEs have been the cornerstone of the mortgage market for decades, so they will have to be infused with fresh capital, as Fannie and Freddie were recently. There is no other choice here for Congress, so they will retain their positions in the markets.

The GSEs will probably expand their scope, including the support of jumbos, with an expanded mandate from Congress in 2008.


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