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CREDIT EXPANSION
New Century and Ameriquest were especially aggressive. New Century’s “Focus
” plan concentrated on “originating loans with characteristics for which whole
loan buyers will pay a high premium.” Those “whole loan buyers” were the firms on
Wall Street that purchased loans and, most often, bundled them into mortgage-
backed securities. They were eager customers. In , New Century sold . bil-
lion in whole loans, up from . billion three years before, launching the firm from
tenth to second place among subprime originators. Three-quarters went to two secu-
ritizing firms—Morgan Stanley and Credit Suisse—but New Century reassured its
investors that there were “many more prospective buyers.”
Ameriquest, in particular, pursued volume. According to the company’s public
statements, it paid its account executives less per mortgage than the competition, but
it encouraged them to make up the difference by underwriting more loans. “Our
people make more volume per employee than the rest of the industry,” Aseem Mital,
CEO of Ameriquest, said in . The company cut costs elsewhere in the origina-
tion process, too. The back office for the firm’s retail division operated in assembly-
line fashion, Mital told a reporter for American Banker; the work was divided into
specialized tasks, including data entry, underwriting, customer service, account
management, and funding. Ameriquest used its savings to undercut by as much as
. what competing originators charged securitizing firms, according to an indus-
try analyst’s estimate. Between and , Ameriquest loan origination rose
from an estimated billion to billion annually. That vaulted the firm from
eleventh to first place among subprime originators. “They are clearly the aggressor,”
Countrywide CEO Angelo Mozilo told his investors in . By , Countrywide
was third on the list.
The subprime players followed diverse strategies. Lehman and Countrywide pur-
sued a “vertically integrated” model, involving them in every link of the mortgage
chain: originating and funding the loans, packaging them into securities, and finally
selling the securities to investors. Others concentrated on niches: New Century, for
example, mainly originated mortgages for immediate sale to other firms in the chain.
When originators made loans to hold through maturity—an approach known as
originate-to-hold—they had a clear incentive to underwrite carefully and consider the
risks. However, when they originated mortgages to sell, for securitization or other-
wise—known as originate-to-distribute—they no longer risked losses if the loan de-
faulted. As long as they made accurate representations and warranties, the only risk
was to their reputations if a lot of their loans went bad—but during the boom, loans
were not going bad. In total, this originate-to-distribute pipeline carried more than
half of all mortgages before the crisis, and a much larger piece of subprime mortgages.
For decades, a version of the originate-to-distribute model produced safe mort-
gages. Fannie and Freddie had been buying prime, conforming mortgages since the
s, protected by strict underwriting standards. But some saw that the model now
had problems. “If you look at how many people are playing, from the real estate agent
all the way through to the guy who is issuing the security and the underwriter and
the underwriting group and blah, blah, blah, then nobody in this entire chain is re-
sponsible to anybody,” Lewis Ranieri, an early leader in securitization, told the FCIC,
