Too Much Risk.

I appreciated Steve Waldman’s article at his excellent blog Interfluidity , which was also posted at Naked Capitalism .  I have a slightly different take on the topic, which I expressed in the comments section of each blog: Steve, I think we had two, maybe three things go on here. First, the “originate to sell” model failed because basic underwriting was not done well. The incentives against failure were not left with the originator, i.e., having to hold onto a large equity piece. If the underwriting had been done well, the next problem would be weak financing structures on the part of the certificate buyers. Many were leveraged higher than prudent, even on “super seniors.” Finally, the servicing models are often flawed. There has to be adequate pay for servicing and special servicing, or else loss mitigation efforts will be poor. Risks were taken and avoided, but many of the seemingly avoided risks come back when the one guaranteeing the avoid...