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THE MORTGAGE MACHINE 

loans as “an open ‘invitation to fraud’ that justified the industry term ‘liar’s loans.’” 
Speaking of lending up to  at Citigroup, Richard Bowen, a veteran banker in the
consumer lending group, told the FCIC, “A decision was made that ‘We’re going to
have to hold our nose and start buying the stated product if we want to stay in busi-

ness.’” Jamie Dimon, the CEO of JP Morgan, told the Commission, “In mortgage
underwriting, somehow we just missed, you know, that home prices don’t go up for-
ever and that it’s not sufficient to have stated income.” 
In the end, companies in subprime and Alt-A mortgages had, in essence, placed
all their chips on black: they were betting that home prices would never stop rising.
This was the only scenario that would keep the mortgage machine humming. The ev-
idence is present in our case study mortgage-backed security, CMLTI -NC,
whose loans have many of the characteristics just described.
The , loans bundled in this deal were adjustable-rate and fixed-rate residen-
tial mortgages originated by New Century. They had an average principal balance of

,—just under the median home price of , in . The vast major-
ity had a -year maturity, and more than  were originated in May, June, and July
, just after national home prices had peaked. More than  were reportedly for
primary residences, with  for home purchases and  for cash-out refinancings.
The loans were from all  states and the District of Columbia, but more than a fifth
came from California and more than a tenth from Florida. 
About  of the loans were ARMs, and most of these were /s or /s. In a
twist, many of these hybrid ARMs had other “affordability features” as well. For ex-
ample, more than  of the ARMs were interest-only—during the first two or three
years, not only would borrowers pay a lower fixed rate, they would not have to pay
any principal. In addition, more than  of the ARMs were “/ hybrid balloon”
loans, in which the principal would amortize over  years—lowering the monthly
payments even further, but as a result leaving the borrower with a final principal pay-
ment at the end of the -year term.
The great majority of the pool was secured by first mortgages; of these,  had a
piggyback mortgage on the same property. As a result, more than one-third of the
mortgages in this deal had a combined loan-to-value ratio between  and .
Raising the risk a bit more,  of the mortgages were no-doc loans. The rest were

“full-doc,” although their documentation was fuller in some cases than in others. In
sum, the loans bundled in this deal mirrored the market: complex products with high
LTVs and little documentation. And even as many warned of this toxic mix, the reg-
ulators were not on the same page.

FEDERAL REGULATORS: “IMMUNITY FROM
MANY STATE LAWS IS A SIGNIFICANT BENEFIT”
For years, some states had tried to regulate the mortgage business, especially to clamp
down on the predatory mortgages proliferating in the subprime market. The national
thrifts and banks and their federal regulators—the Office of Thrift Supervision (OTS)
and the Office of the Comptroller of the Currency (OCC), respectively—resisted the