PERSON OF THE WEEK: Dan Immergluck Picks Up The Fallen Dominoes

This week, MortgageOrb speaks with Dan Immergluck, associate professor at Georgia Institute of Technology and author of ‘Foreclosed: High-Risk Lending, Deregulation and the Undermining of the American Mortgage Market.’ Immergluck's book, which is published by Cornell University Press, details the chain of events that triggered today's mortgage banking crisis.

Q: What was the inspiration for writing this book, and how long did it take to complete?

Immergluck: I wrote the proposal for the book in the middle of 2007, when the subprime crisis was just beginning to make national headlines in the mainstream press. I had been studying and writing on mortgage markets, subprime lending and foreclosures for almost 10 years, and knew that things were only going to get worse by the time the book came out.

Much of my research in recent years has been on the ‘spillover’ or contagion problems with subprime lending, other forms of high-risk (e.g., exotic) loans, and foreclosures. I also felt that while business press books might take a shorter-term perspective, I wanted to tell the story of the subprime fiasco from a longer-term view – one informed by a knowledge of the historical development of mortgage markets in the U.S.

I wrote the book over a period of about nine months, with some follow-on editing as it made its way through the review process that academic books go through.

Q: What were the most surprising discoveries you came across in doing the research for this book?

Immergluck: I am not sure I ‘discovered’ a lot of new facts. I certainly compiled a lot of statistics and data, most of which I was already somewhat familiar with.

However, I do think that writing the book enabled me to identify a clear pattern of both active and passive deregulation that occurred over a period of roughly 30 years that served to create an increasingly fragile and risk-prone mortgage market. By passive regulation I mean the failure of policy-makers to adapt regulatory systems to dramatic changes in the structure of mortgage markets (e.g., the rise and dominance of non-depository lenders, changes in funding sources, etc.).

Q: Were the subprime and so-called exotic mortgage inevitably doomed to create toxic results?

Immergluck: They were doomed to create toxic results, especially given the regulatory context that we have had. They were exceedingly vulnerable to even modest shifts in local housing and employment markets, and built largely on a model of fast price appreciation that enabled borrowers the escape valve of always being able to sell for substantially more than they bought over a short period of time.

I do think there is significant merit in the concept of a system where the relative risk and cost to lenders of offering riskier products is substantially higher and runs to both the originators and funders of the loans. This is partially reflected in the Treasury Department's recent proposals favoring ‘plain vanilla’ products.

Q: What role did the securitization process play in bringing about the collapse of the housing market and, by extension, the general economy?

Immergluck: A large amount. The evidence is overwhelming that private-label securitization, in particular, funneled global capital into the mortgage market with little restraint. The U.S. mortgage market was the path of least resistance for the surplus global capital that had built up at the turn of the 21st century. My book details the many principal-agent-type failures that plagued the chain of capital down to the mortgage level.

It is important to recognize that the groundwork for unrestrained and essentially unregulated private-label mortgage channels was laid in the 1980s. Of course, policy-makers could have restrained these channels through regulation both at the point of the loan origination and throughout the capital-markets processes (e.g., oversight or regulation of credit ratings agencies, credit derivatives, etc.).

However, federal policy-makers – both in Congress and in the banking regulators – chose to do just the opposite by blocking state efforts to increase lending regulations and by failing to adapt to a changing market.

They also did things like permit the large investment banks to increase their leverage ratios, which increased high-risk lending volumes and magnified the impact of the associated risks as they were transferred to the global financial economy.

Q: How would you categorize the mortgage banking industry's response to the rising tide of foreclosures? Specifically, what is your view of efforts such as HOPE NOW and Hope for Homeowners?

Immergluck: My basic view is that the federal response was far too slow in developing and, especially over the first year or so of the national crisis, was far too tepid and basically window dressing. HOPE NOW was largely supported by the previous administration as an alternative to real federal policy and especially Sen. Richard Durbin's bankruptcy cramdown proposal.

Hope for Homeowners was doomed by excessive focus on avoiding any possibility of ‘moral hazard’ on the part of either borrowers or lenders – so much so that the program became unworkable. Given the lack of focus on moral hazard in the design of TARP and related bailout programs, in retrospect at least, this excessive focus seems particularly odd.

Unfortunately, the longer the problem progressed, the more the opportunities for successful intervention declined, and by late 2008, declined quite rapidly, as the broader economy tanked and property values had begun to fall so fast.

If foreclosures had been reduced earlier on, property values would likely have stabilized earlier – they still would have fallen, but much more slowly. The vicious cycle could have been arrested – at least mitigated. By late 2008 and early 2009, the contagion to the wider economy and to a wider spectrum of borrowers made any intervention much more difficult.


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