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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

down—it became a commodity. That was a change in the culture. . . . It was sudden,
unexpected.” 
On the surface, it looked like prosperity. After all, the basic mechanisms making
the real estate machine hum—the mortgage-lending instruments and the financing
techniques that turned mortgages into investments called securities, which kept cash
flowing from Wall Street into the U.S. housing market—were tools that had worked
well for many years.
But underneath, something was going wrong. Like a science fiction movie in
which ordinary household objects turn hostile, familiar market mechanisms were be-
ing transformed. The time-tested -year fixed-rate mortgage, with a  down pay-
ment, went out of style. There was a burgeoning global demand for residential
mortgage–backed securities that offered seemingly solid and secure returns. In-
vestors around the world clamored to purchase securities built on American real es-
tate, seemingly one of the safest bets in the world.
Wall Street labored mightily to meet that demand. Bond salesmen earned multi-
million-dollar bonuses packaging and selling new kinds of loans, offered by new
kinds of lenders, into new kinds of investment products that were deemed safe but
possessed complex and hidden risks. Federal officials praised the changes—these
financial innovations, they said, had lowered borrowing costs for consumers and
moved risks away from the biggest and most systemically important financial insti-
tutions. But the nation’s financial system had become vulnerable and intercon-
nected in ways that were not understood by either the captains of finance or the
system’s public stewards. In fact, some of the largest institutions had taken on what
would prove to be debilitating risks. Trillions of dollars had been wagered on the
belief that housing prices would always rise and that borrowers would seldom de-
fault on mortgages, even as their debt grew. Shaky loans had been bundled into in-
vestment products in ways that seemed to give investors the best of both
worlds—high-yield, risk-free—but instead, in many cases, would prove to be high-
risk and yield-free.
All this financial creativity was a lot “like cheap sangria,” said Michael Mayo, a
managing director and financial services analyst at Calyon Securities (USA) Inc. “A
lot of cheap ingredients repackaged to sell at a premium,” he told the Commission. “It
might taste good for a while, but then you get headaches later and you have no idea
what’s really inside.” 
The securitization machine began to guzzle these once-rare mortgage products
with their strange-sounding names: Alt-A, subprime, I-O (interest-only), low-doc,
no-doc, or ninja (no income, no job, no assets) loans; –s and –s; liar loans;
piggyback second mortgages; payment-option or pick-a-pay adjustable rate mort-
gages. New variants on adjustable-rate mortgages, called “exploding” ARMs, featured
low monthly costs at first, but payments could suddenly double or triple, if borrowers
were unable to refinance. Loans with negative amortization would eat away the bor-
rower’s equity. Soon there were a multitude of different kinds of mortgages available
on the market, confounding consumers who didn’t examine the fine print, baffling