MBS Co-Inventor Concerned About Future of RMBS


Lew Ranieri doesn’t suffer fools easily—and it galls him that he sometimes gets blamed for the nation’s housing crisis because he helped put mortgage-backed securities on the map in the early 1980s when he was a young bond trader at Salomon Brothers.

As Ranieri and those who’ve known him for years will tell you, there’s nothing wrong with securitizing “A” paper loans as long as they are properly underwritten. (Many in the industry agree, though everyone’s waiting to hear on the final regulatory definition of “qualified residential mortgage.”)

Certain pundits and journalists throw his name on the housing crisis blame list without realizing that he never sold a nonprime bond, and that he departed from Wall Street long before the first subprime crisis of the late 1990s, and then the blow up that commenced in 2007-2008 when firms such as Bear Stearns, Citicorp Securities, Greenwich Capital, Lehman Brothers and Merrill Lynch were securitizing zero-downpayment and 80-10-10 loans with no credit checks and doctored FICO scores.

In a speech made in late 2006, at a forum sponsored by the Office of Thrift Supervision, Ranieri called the industry on the carpet, warning of a “powerful MBS sector (nonprime) that was untethered in its enthusiasm.” The former Salomon Brothers vice chairman warned that Wall Street had gone overboard securitizing subprime mortgages without paying much attention to credit quality.

He warned about layered risk and nonexistent underwriting standards on subprime, and worried that the rating agencies were now playing the role of “quasi regulator.” He was right—but he seldom gets credit for that speech, which was covered in a few wire reports as well as National Mortgage News.

Although he is best known in the larger financial services industry as the man who helped invent the MBS, during his long career he also is credited with taking a failed Houston SL and reconstituting it (with federal aid) into Bank United of Houston, a thrift he sold a decade later for $1.2 billion. (The one blemish on his career is the collapse of another Texas bank, Franklin Bank, which failed because of too many builder loans.)

These days Ranieri continues to manage a group of private equity funds that fall under the banner of his longtime company, Hyperion. A few years back he also launched the Selene Residential Mortgage Opportunity Fund, which oversees a specialty servicer that handles troubled loans and properties.

The Brooklyn native continues to attend industry events and makes speeches, and serves as an elder statement of sorts on industry matters far and wide. One of his latest causes is getting the GSEs to move their massive holdings of foreclosed homes.

Ranieri believes that Fannie Mae and Freddie Mac should ease their current restrictions and allow individual investors to purchase up to 50 foreclosed homes each. (Fannie currently limits individual investors to 10 real estate owned properties each, while Freddie restricts them to just four.)

As for the MBS market, he told National Mortgage News, “It’s not clear we’ll have a really workable RMBS market in the near future. One will be created, but it may be a year away.”

In an email exchange he noted, “I’m not convinced that we’ll ever replace the government market altogether, and at best, the dominance of the government role will be decreased to 60%-65%. Given the nature of the capital markets, it’s improbable that a Fannie, Freddie, or possibly a giant Ginnie Mae, will not be part of the mortgage market.”

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