The Godfather of Mortgage-Backed Securities Makes a Pitch For Better Loans For Investors

I was listening to CNBC yesterday while I did some work at home on my computer. I mostly just turn it on for background noise. Paradoxically, it seems to help me concentrate on the task at hand, a "talent" I honed as a kid doing my homework in front of the TV (shhhh, don't tell my parents). But every once in a while something pops on that gets my attention and I tune in for a bit.

In this particular instance, David Faber was conducting a live interview with Lewis Ranieri, the creator of the mortgage-backed security (MBS). That definitely got my attention. I suspected Mr. Ranieri, the former vice chairman of Soloman Brothers, had taken some heat following the meltdown that ultimately resulted from his invention, and I was curious to hear what he had to say. The actual interview was brief; although he was interesting and articulate, he didn't really share too much that I wasn't already, sadly, well aware of. He did point out that MBSs had worked extremely well for thirty odd years before things got out of hand. He also felt that there is still a need for nongovernment-originated MBSs in this market: that banks cannot carry all the loans they make and that the government or GSEs (should they continue to exist) cannot manage the load of securitization alone.

One comment that he made had me wanting to jump up and applaud. He suggested that, in his opinion, real estate investors need some assistance and encouragement in the form of reasonable loans to support their work. "Who knows the local market better?" he asked. He went on to say that local real estate investors who could fix up distressed properties and resell or rent them should be supported by some sort of investor financing programs. I couldn't agree more. I would also add that it would be nice if they weren't hamstrung by government intervention based on posturing rather than substance, designed to show that they are all about helping worthy homeowners, not so much blood-sucking leeches investors.

Mr. Ranieri is currently doing what the banks should be doing, but either can't (because they are merely the servicer and not the investor) or won't. He and his partners are buying distressed mortgage debt at a steep discount, then approaching the defaulted homeowners to help them get back on track. Although he didn't talk about any of this in his interview, I have read previously that he offers homeowners a principle reduction on their mortgage, along with reasonable financing terms including an attractive fixed interest rate. This, he reasons, turns "renters", i.e. severely underwater homeowners with crappy loans and no hope of breaking even perhaps in their lifetimes, into homeowners again, with an incentive to keep up their properties and become active citizens of their communities. These born-again homeowners now have actual equity or close to it. Miraculously, they begin to pay their mortgages again. They have a "new lease on life", no Ex-Lax required. Once the new loans have been performing for six months, the "seasoning" period, Ranieri's group resells them at a profit. A brilliant business model, in my humble opinion.

Now most of us have neither the connections nor the wherewithall to do the sorts of investing that Mr. Ranierei is doing. But the best way to work through the current glut of homes on the market and the shadow inventory to come is for those homes to be in a condition that someone actually wants to purchase them. For the most part, banks won't fix them up and their terrible condition leaves them lingering endlessly on the market, a blight on the neighborhood, or selling at rock bottom prices that drag the market down further. A little support for those that are at ground  zero helping to reverse this trend would, as Mr. Ranieri suggests, be welcome. At least try not to be appalled at the thought that one of them might turn an actual profit!