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Why The Fed Missed The Crash

The Fed was looking mainly at housing as the risk area and they seem to have missed completely what was occurring in CMBS underwriting and issuance

By Joel Ross | Updated on October 18, 2015

In Ben Bernancke’s new book he goes into detail about how the fed was tracking the housing market and they considered that the key data point to track to determine the health of the capital markets, and it is now clear why the Fed, Treasury and others missed what was happening. While the housing market is a key component of economic growth or failure, tracking the RMBS market was not a major part of what caused the crash. It was very clear to many of us who were deeply involved in the CMBS market in 2006-2007, that things there had gotten to the ridiculous, and that a crash was inevitable. Underwriting had all but gone out the window, loans were being made based purely on projections and at .98 debt cover. Mezz levels had reached as high as 95% in some cases, and there was a complete lack of pricing the risk properly. The pressure was on to fill large pools and to pump them out to the uninformed buyers in Europe and China. Pump and dump was the order of the day. The rating agencies became too loose under pressure from issuers and by 2007 we even had virtual loans going into pools. That was when I was certain the crash was inevitable.

 

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