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486 Dissenting Statement

or involve the weakening of underwriting standards. Th ose standards—what made
up the traditional U.S. mortgage—were generally 15 or 30 year amortizing loans to
homebuyers who could provide a downpayment of at least 10-to-20 percent and had
good credit records, jobs and steady incomes. Because of its inherent quality, this
loan was known as a prime mortgage.
Th ere were subprime loans and subprime lenders, but in the early 1990s
subprime lenders were generally niche players that made loans to people who
could not get traditional mortgage loans; the number of loans they generated was
relatively small and bore higher than normal interest rates to compensate for the
risks of default. In addition, mortgage bankers and others relied on FHA insurance
for loans with low downpayments, impaired credit and high debt ratios. Until the
1990s, these NTMs were never more than a fraction of the total number of mortgages
outstanding. Th e reason that low underwriting standards were not generally used is
simple. Low standards would result in large losses when these mortgages defaulted,
and very few lenders wanted to hold such mortgages. In addition, Fannie and
Freddie were the buyers for most middle class mortgages in the United States, and
they were conservative in their approach. Unless an originator made a traditional
mortgage it was unlikely that Fannie or Freddie or another secondary market buyer
could be found for it.
Th is is common sense. If you produce an inferior product—whether it’s a
household cleaner, an automobile, or a loan—people soon recognize the lack of
quality and you are out of business. Th is was not the experience with mortgages,
which became weaker and riskier as the 1990s and 2000s progressed. Why did this
happen?
In its report, the Commission majority seemed to assume that originators of
mortgages controlled the quality of mortgages. Much is made in the majority’s report
of the so-called “originate to distribute” idea, where an originator is not supposed to
care about the quality of the mortgages because they would eventually be sold off .
Th e originator, it is said, has no “skin in the game.” Th e motivation for making poor
quality mortgages in this telling is to earn fees, not only on the origination but in
each of the subsequent steps in the securitization process.
Th is theory turns the mortgage market upside down. Mortgage originators
could make all the low quality mortgages they wanted, but they wouldn’t earn a
dime unless there was a buyer. Th e real question, then, is why there were buyers
for inferior mortgages and this, as it turns out, is the same as asking why mortgage
underwriting standards, beginning in the early 1990s, deteriorated so badly. As
Professor Raghuram Rajan notes in Fault Lines, “[A]s brokers came to know that
someone out there was willing to buy subprime mortgage-backed securities without
asking too many questions, they rushed to originate loans without checking the
borrowers’ creditworthiness, and credit quality deteriorated. But for a while, the
problems were hidden by growing house prices and low defaults—easy credit
masked the problems caused by easy credit—until house prices stopped rising and
the fl ood of defaults burst forth.” 60
Who were these buyers? Table 1, reporting the number of NTMs outstanding
on June 30, 2008, identifi ed government agencies and private organizations required
by the government to acquire, hold or securitize NTMs as responsible for two-thirds

60 Raghuram G. Rajan, Fault Lines, p.44.