The financial wizards who concocted the complicated mortgage-linked investments that nearly brought down the world economy are trying to come back from the dead.
Thousands of them trooped to a conference center eight miles south of the nation's capital this week, looking for another chance. The difference this time: They promise to back loans to borrowers with real jobs, real incomes and solid credit scores.
They have no choice, of course. The financial meltdown wiped out most of their business, which explains why this meeting of investors, bankers and lawyers was held at the Gaylord National conference center and hotel here. It's a long way from Las Vegas, where the conference had been held for years.
"We are still living through the painful aftermath of a financial and economic crisis sparked, at least partially, by the past practices of our industry," said Ralph Daloisio, chairman of the American Securitization Forum, which runs the annual event.
Some of the 4,400 in attendance grumbled about the lack of pizazz. Cocktails one night were served in a brightly lit conference hall, a letdown compared with the Venetian casino on the Vegas Strip. Attendance was down 35 percent from the peak in 2007, but the outlook was less gloomy than a year ago.
The crowd, however, had to confront an unsettling truth. They aren't masters of the universe anymore. The government is.
More than 90 percent of home loans at the moment have some form of government backing, compared with about 30 percent at the peak of the housing boom. More worrying, the Obama administration has no exit strategy.
"This is a group of people, as an industry, that are trying to turn a machine back on," said Jim Callahan, executive director of PentAlpha Capital Group., an investment adviser in Greenwich, Conn. "But the majority of that machine is now controlled by the government — without their participation."
During its heyday, the mortgage securities industry gushed money. About $1.2 trillion worth of mortgage-backed securities were issued in 2005. As the housing market crashed and losses piled up, the value of new securities issued annually plummeted 90 percent, according to Inside Mortgage Finance, a trade publication. Most of the business last year was in repackaging old loans into new investments.
The system works like this: When you take out a mortgage, it is packaged with thousands of others and turned into a security that is bought and sold by investors.
Many at the conference expect some business to trickle back this year as the housing market recovers. But investors will be extremely cautious. They are likely to buy only the safest of mortgages: those made to buyers with down payments of 30 to 40 percent, rock-sold credit scores and proof of income. No more $500,000 mortgages for taxicab drivers.
"As an investor, I really want to know what the hell I'm buying," said William Moliski, managing director of Redwood Trust Inc., a California-based real estate investment firm.
Without such investors, the federal government has taken up the slack. The Federal Reserve is spending $1.25 trillion to buy up mortgage securities issued by Fannie Mae and Freddie Mac, which nearly collapsed in September 2008 and are now under government control.
The Obama administration has given no indication of how it intends to restructure the mortgage funding system over the long term. Officials had promised to deliver a plan by early February, but are now being vague.
Meanwhile, lawmakers and government agencies are trying to figure out the new rules for mortgage securities that don't involve the government. One key question is whether companies that package and sell such securities should be forced to hold a portion of those investments on their own books.
With some "skin in the game," the theory goes, they would be more careful to ensure borrowers are screened properly. Another idea is for regulators to set a basic, industrywide level lending standard for things like down payments and borrowers' debt levels.
The industry fears the government is overreacting and warns regulators are shooting in different directions.
"We're not opposed to regulation ... We did things poorly. But it's got to fit together. The details really matter," said Jason Kravitt, a senior partner at the law firm Mayer Brown in New York.
Nevertheless, such financial engineering may be essential to kick-starting the economy. The industry argues that banks are simply not able to lend enough money on their own.
But such investments could still be treacherous because the outlook for the economy and home prices is uncertain. Forty percent of the trade group's members believe the industry won't return to normal levels until 2012.
Still, the government can't dominate the mortgage market forever. Two big pieces of federal support are due to go away this spring, when the Fed stops its mortgage market support and tax credits for homebuyers expire.
"It's not the government's role to come in and completely fix everything that's wrong with the market," said Seth Wheeler, a senior Treasury Department adviser.
Some in the industry want the government out as soon as possible. Investors would be more willing to pour more money into mortgages "if there wasn't a lot of meddling going on," said Wellington Denahan Norris, chief investment officer of Annalay Capital Management, a New York-based investment firm.
But Armando Falcon, formerly the top regulator for Fannie Mae and Freddie Mac, doubted that idea. "We wouldn't have a mortgage market it wasn't for government intervention."
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