The Mortgage Crisis in Two Documents

This is a very, very good, direct, no nonsense, easy to understand way to explain the mortgage part of this little sitch we find ourselves in:

William K. Black: The Two Documents Everyone Should Read to Better Understand the Crisis

Basically:

1. Before it tumbled, S&P management (at least a particular manager) actively discouraged testing of the underlying "tapes" of the supporting files on bundles of mortgages in CMOs that were being rated by the agency. It was "totally unreasonable" to ask for these tapes, mostly because the buyers of these bundles didn't bother to ask for them, since they were in too much of a hurry to package them up and sell off the trenches. This is also going to make it really hard to figure out what happened. It's not clear that the documents even exist for some of them.

2. After the fall became clear, independent auditors not only found lack of documentation, but widespread fraud. Claiming occupancy of a house you are just buying to flip, for example, will reduce the apparent risk (and therefore the cost) of the mortgage, but also totally screws up the models that rely on historical default rates on owner-occupied properties. Not that historical default rates are any better than tea leaves in a market like this.

Fascinating.