Mortgage legend says price slump deeper than seems

Credited as the 'father' of the market for bundling mortgages and selling them on Wall Street as debt investments, Ranieri backs a bill by US Representative Barney Frank, a Democrat from Massachusetts, that would make lenders accept losses on teetering home loans in exchange for government guarantees.

“What he is trying to do is part of what really needs to be done,” he added. Frank's bill would allow the Federal Housing Authority to insure $300 billion of home loans. Lenders would erase some of the original loan amount and could even loosen loan terms in order to win the government backstop.

“At this point in the crisis, those of us who are practitioners would take what we can get. I wouldn't turn down less! Because we need a re-performing program, which is what in effect the Frank bill is.”

Ranieri said the key to success for lenders was keeping people in their homes and his main concern was to make sure that the relief targeted lower- and middle-income families buying homes to live in rather than helped investors.

The inventory of homes for sale swelled by 40,000 to 4.06 million homes in March, or a 9.9 months' supply at the current sales pace from 9.6 months in February, according to the National Association of Realtors . Meanwhile, the median national home price declined 7.7% from a year ago to $200,700.

Ranieri, who helped create the mortgage “securitization” market while at Salomon Brothers, also favors new regulation of those involved in selling loans.

From mortgage brokers selling loans to home buyers to Wall Street banks who sold the securitized bundles of mortgages to investors, no one in the mortgage industry had a legal duty to work in the best financial interests of the person taking out the loan, he said.

That is in contrast to Wall Street rules on selling appropriate products to investors.

“The whole system could sell (a) person the biggest investment he ever had, his house, in an inappropriate structure, and it was fine. It makes no sense. It is on its surface patently nuts,” he said. (Reuters)