Did Mortgage-Security Professionals Time the Housing Crash?
A forthcoming AER paper examines whether professionals in the mortgage securitization industry foresaw the housing crash. If these professionals knew that they were buying and selling toxic assets, they would betray this knowledge by their personal housing decisions. For example, if you thought that the housing market was going to crash, you wouldn’t rush out to buy a second home. However, the AER paper shows that securitization professionals were as aggressively invested in the housing market as comparable professionals.
The researchers found their securitization professionals by looking at the attendees of the 2006 American Securitization Forum. These professionals were mostly mid-level managers like vice presidents and managing directors. If the industry knew that a crash was imminent, these people would have been perfectly placed to take advantage of this information when making their personal housing decisions. The researchers compare the housing portfolios of the securitization professionals to those of equity analysts and lawyers. The assumption is that these three groups would be similar except for the fact that the securitization professionals would be better informed about the housing market.
The paper’s main findings:
- Securitization professionals were less likely to divest from housing in every year from 2003-2006 — the prime “bubble period.” They were slightly more likely to divest in 2007-2009 during the bust.
- Securitization professionals aggressively upgraded to better homes and bought second homes during the bubble period.
- Southern California’s housing market was more “bubbly” than New York’s. Securitization professionals were comparatively more aggressive in Southern California than New York.
- A debtor who foresaw the possibility of a market crash would be less likely to take out a home equity line of credit since lenders have access to non-house assets in the case of default. Foreknowledge of the crash is not demonstrated in differential rates of tapping into home equity.
- Overall, the housing portfolios of the securitization professionals saw worse returns than those of equity analysts and lawyers.
- The housing portfolio of employees on the seller-side did worse than those on the buyer-side. This casts doubt on the view that the seller-side of the industry exploited their superior knowledge to dump overvalued securities on less knowledgeable buyers.
- The housing portfolios of managers from companies that cratered during the crash (like Lehman and Countrywide) did worse than the portfolios of managers from companies that did relatively well (like BB&T and Wells Fargo).