Starting in the 1970s, as they confronted the instability of interest rates and its damaging implications for America’s mortgage model, the GSEs took a further critical step. Working with the help of investment banks, they pioneered securitization.19 Rather than holding the locally originated mortgages on their own books and financing them by issuing bonds, they would sell the mortgages directly to investors. To do so they packaged the mortgages into pools, in which they sold shares—securities. The idiosyncratic risks of individual loans would be pooled. Investors looking to hold real estate
...more
