An NBER
working paper released today conducts a "post mortem" on the role of non-agency mortgage-backed securities (MBS) in the 2008 financial crisis. The authors, Juan Ospina and Harald Uhlig, suggest that some of the standard narratives about the financial crisis were "created in the heat of the moment" and merit re-examination a decade later.
"One such standard narrative has it that the financial meltdown of 2008 was caused by an
overextension of mortgages to weak borrowers, repackaged and then sold to willing lenders
drawn in by faulty risk ratings for these mortgage back securities. To many, mortgage backed
securities and rating agencies became the key villains of that financial crisis. In particular,
rating agencies were blamed for assigning the coveted AAA rating to many securities, which
did not deserve it, particularly in the subprime segment of the market, and that these ratings
then lead to substantial losses for institutional investors, who needed to invest in safe assets
and who mistakenly put their trust in these misguided ratings...
First, were these mortgage backed securities bad investments? Second, were the ratings wrong?
We answer these questions, using a new and detailed data set on the universe of non-agency
residential mortgage backed securities (RMBS), obtained by devoting considerable work to
carefully assembling data from Bloomberg and other sources. This data set allows us to examine
the actual repayment stream and losses on principal on these securities up to 2014, and thus
with a considerable distance since the crisis events...We find that the conventional narrative needs
substantial rewriting: the ratings and the losses were not nearly as bad as this narrative would
lead one to believe.
An ungated version of the paper is available
here.