Investors are likely to say "fool me once…" which may explain why the volume for newly issued private label residential mortgage securitizations is a fraction of what it was a few years ago. Through bitter experience, bond purchasers learned about the moral hazard embedded in private RMBS and their grossly inadequate legal protections."The private RMBS market was at the heart of the financial panic and the Great Recession that followed," writes Mark Zandi of Moody's Analytics. Indeed. At year-end 2007, private RMBS totaled $2.2 trillion. According to Zandi's tally, those bonds realized losses, during the 2006-2012 period, of $449 billion.  That amount exceeded the total losses on $9 trillion of mortgage debt financed by everyone else, all depository institutions and all government-backed lenders, including Fannie Mae and Freddie Mac. Also, Zandi excludes synthetic subprime collateralized debt obligations, which financed nothing tangible and which lost more money than Fannie and Freddie combined.

More pointedly, the heart of the financial panic and the Great Recession that followed was an epidemic of fraud and sloppy recordkeeping facilitated by the originate-to-distribute model for private RMBS.  Parties complicit in fraud – borrowers, mortgage brokers, originators, rating agencies, investment banks and servicers – calculated that the odds of being held fully accountable were close to nil. That assessment has stood the test of time.

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