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ALL IN 

they were failing. Loan purchasers and securitizers ignored their own due diligence
on what they were buying. The Federal Reserve and the other regulators increasingly
recognized the impending troubles in housing but thought their impact would be
contained. Increased securitization, lower underwriting standards, and easier access
to credit were common in other markets, too. For example, credit was flowing into
commercial real estate and corporate loans. How to react to what increasingly ap-
peared to be a credit bubble? Many enterprises, such as Lehman Brothers and Fannie
Mae, pushed deeper.
All along the assembly line, from the origination of the mortgages to the creation
and marketing of the mortgage-backed securities and collateralized debt obligations
(CDOs), many understood and the regulators at least suspected that every cog was
reliant on the mortgages themselves, which would not perform as advertised.

THE BUBBLE: “A CREDITINDUCED BOOM”
Irvine, California–based New Century—once the nation’s second-largest subprime
lender—ignored early warnings that its own loan quality was deteriorating and
stripped power from two risk-control departments that had noted the evidence. In a
June  presentation, the Quality Assurance staff reported they had found severe
underwriting errors, including evidence of predatory lending, legal and state viola-
tions, and credit issues, in  of the loans they audited in November and December
. In , Chief Operating Officer and later CEO Brad Morrice recommended
these results be removed from the statistical tools used to track loan performance,
and in , the department was dissolved and its personnel terminated. The same
year, the Internal Audit department identified numerous deficiencies in loan files; out
of nine reviews it conducted in , it gave the company’s loan production depart-
ment “unsatisfactory” ratings seven times. Patrick Flanagan, president of New Cen-
tury’s mortgage-originating subsidiary, cut the department’s budget, saying in a
memo that the “group was out of control and tries to dictate business practices in-
stead of audit.” 
This happened as the company struggled with increasing requests that it buy
back soured loans from investors. By December , almost  of its loans were
going into default within the first three months after origination. “New Century had
a brazen obsession with increasing loan originations, without due regard to the risks
associated with that business strategy,” New Century’s bankruptcy examiner
reported. 
In September —seven months before the housing market peaked—thou-
sands of originators, securitizers, and investors met at the ABS East  conference
in Boca Raton, Florida, to play golf, do deals, and talk about the market. The asset-
backed security business was still good, but even the most optimistic could read the
signs. Panelists had three concerns: Were housing prices overheated, or just driven by
“fundamentals” such as increased demand? Would rising interest rates halt the