Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

With so many interests engaged, the expansion in US mortgage lending in the final burst of the boom was spectacular, not to say grotesque. Between 1999 and 2003, 70 percent of the new mortgages issued in the United States were still conventional GSE-conforming. With the end of the refinancing boom, that balance shifted. By 2006, 70 percent of new mortgages were subprime or other unconventional loans destined for securitization not by the GSE, but as private label MBS. In both 2005 and 2006, $1 trillion in unconventional mortgages were issued, compared with $100 billion in 2001. Fannie Mae and Freddie Mac were scrambling to keep up, purchasing $300 billion in nonagency securitized mortgages to hold in their own portfolios. The GSEs were driven. They were not the drivers. They were competing with upstarts like Countrywide, which in 2006 was responsible for originating 20 percent of all mortgages in the United States.51 They were competing with an ultrasophisticated investment bank like Lehman Brothers that had assembled an entire pipeline. In 2005 two thirds of the mortgages contained in Lehman’s issuance of $133 billion in MBS/CDO were sourced from its own subprime loan originators. A top Wall Street name was scraping the very bottom of the credit barrel.