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7

THE MORTGAGE MACHINE

CONTENTS
Foreign investors: “An irresistible profit opportunity”.........................................
Mortgages: “A good loan” ...................................................................................
Federal regulators: “Immunity from many state laws is a significant benefit”....
Mortgage securities players: “Wall Street was very hungry for our product”......
Moody’s: “Given a blank check”..........................................................................
Fannie Mae and Freddie Mac: “Less competitive in the marketplace”................

In , commercial banks, thrifts, and investment banks caught up with Fannie
Mae and Freddie Mac in securitizing home loans. By , they had taken the lead.
The two government-sponsored enterprises maintained their monopoly on securitiz-
ing prime mortgages below their loan limits, but the wave of home refinancing by
prime borrowers spurred by very low, steady interest rates petered out. Meanwhile,
Wall Street focused on the higher-yield loans that the GSEs could not purchase and
securitize—loans too large, called jumbo loans, and nonprime loans that didn’t meet
the GSEs’ standards. The nonprime loans soon became the biggest part of the mar-
ket—“subprime” loans for borrowers with weak credit and “Alt-A” loans, with charac-
teristics riskier than prime loans, to borrowers with strong credit. 
By  and , Wall Street was securitizing one-third more loans than Fannie
and Freddie. In just two years, private-label mortgage-backed securities had grown
more than , reaching . trillion in ;  were subprime or Alt-A. 
Many investors preferred securities highly rated by the rating agencies—or were
encouraged or restricted by regulations to buy them. And with yields low on other
highly rated assets, investors hungered for Wall Street mortgage securities backed by
higher-yield mortgages—those loans made to subprime borrowers, those with non-
traditional features, those with limited or no documentation (“no-doc loans”), or
those that failed in some other way to meet strong underwriting standards.
“Securitization could be seen as a factory line,” former Citigroup CEO Charles
Prince told the FCIC. “As more and more and more of these subprime mortgages
were created as raw material for the securitization process, not surprisingly in hind-
sight, more and more of it was of lower and lower quality. And at the end of that
