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II. HOW 27 MILLION NTMS

PRECIPITATED A FINANCIAL CRISIS

Although the Commission never defi ned the fi nancial crisis it was supposed
to investigate, it is necessary to do so in order to know where to start and stop. If, for
example, the fi nancial crisis is still continuing, then the eff ect of government policies
such as the Troubled Asset Repurchase Program (TARP) should be evaluated.
However, it seems clear that Congress wanted the Commission to concentrate
on what caused the unprecedented events that occurred largely in the fall of 2008,
and for this purpose Ben Bernanke’s defi nition of the fi nancial crisis seems most
appropriate:
Th e credit boom began to unravel in early 2007 when problems surfaced with subprime
mortgages—mortgages off ered to less-creditworthy borrowers—and house prices in
parts of the country began to fall. Mortgage delinquencies and defaults rose, and the
downturn in house prices intensifi ed, trends that continue today. Investors, stunned
by losses on assets they had believed to be safe, began to pull back from a wide range
of credit markets, and fi nancial institutions—reeling from severe losses on mortgages
and other loans—cut back their lending. Th e crisis deepened [in September 2008],
when the failure or near-failure of several major fi nancial fi rms caused many fi nancial
and credit markets to freeze up.” 45
In other words, the fi nancial crisis was the result of the losses suff ered by
fi nancial institutions around the world when U.S. mortgages began to fail in large
numbers; the crisis became more severe in September 2008, when the failure of
several major fi nancial fi rms—which held or were thought to hold large amounts
of mortgage-related assets—caused many fi nancial markets to freeze up. Th is
summary encapsulates a large number of interconnected events, but it makes clear
that the underlying cause of the fi nancial crisis was a rapid decline in the value of
one specifi c and widely held asset: U.S. residential mortgages. Th e next question is
how, exactly, these delinquencies and losses caused the fi nancial crisis.
Th e following discussion will show that it was not all mortgages and
mortgage-backed securities that were the source of the crisis, but primarily NTMs—
including PMBS backed by NTMs. Traditional mortgages, which were generally
prime mortgages, did not suff er substantial losses at the outset of the mortgage
meltdown, although as the fi nancial crisis turned into a recession and housing
prices continued to fall, losses among prime mortgages began to approach the level
of prime mortgage losses that had occurred in past housing crises. However, those
levels were far lower than the losses on NTMs, which reached levels of delinquency
and default between 15 and 45 percent (depending on the characteristics of the
loans in question) because the loans involved were weaker as a class than in any
previous housing crisis. Th e fact that they were also far larger in number than any

45 Speech at Morehouse College, April 14, 2009.
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