Investing In Mortgages 101 with Michael Youngblood

**Phil Weiss** (0:01)
Welcome to the Money Tree Investing Podcast. Stock market, wealth, personal finance, value stocks.

**Michael Youngblood** (0:08)
Invest in your life.

**Kirk Chisholm** (0:11)
Hello, Smart Money Tree Podcast listeners. Welcome to this week's show. My name is Kirk Chisholm, and I'll be your host. So today, I'm joined with Michael Youngblood. Hey, Michael.

**Michael Youngblood** (0:20)
Good afternoon.

**Kirk Chisholm** (0:21)
Good, well, glad to have you here. This is an interesting topic for me. It's one of those topics that people don't know enough about. But before we kind of dive right in, Michael, tell us a little bit about your background.

**Michael Youngblood** (0:31)
I've been an active participant in the US mortgage markets since August of 1980 I began my career in banking. I managed a mortgage portfolio of over a billion dollars from 1981 to 1985 Now, a billion dollars today is basically pocket change. But in 1981, it was a sizable amount of capital.
I originated several of the first mortgage-backed securities, the flavor from Fannie Mae, that's the Federal National Mortgage Association, and the other flavor from Freddie Mac of the Federal Home Loan Mortgage Corporation.
In 1986, I joined Solomon Brothers as the Director of Residential Mortgage Research. This was the era of Henry Kaufman and Louis Rennery, Rennery being known as the father of mortgage securities. Subsequently, I developed mortgage research units for a number of US mortgage dealers, including what is now known as JP Morgan Chase. In fact, it was Jamie Dimond who promoted me to Managing Director in 1994
With the global financial crisis in 2008, I left investment banking and formed a FinTech finance company with a few partners. We provided analytic consulting and data services to our customers, which included the Federal Reserve, the Federal Home Loan Bank of New York, the Federal Housing Finance Agency, the FHA and others. We served both public and private companies. In 2018, we sold the company. I stayed on for a few years and in 2022, formed a family office, began to act as a consultant on my own, and wrote a book on the history of US mortgage securities, which basically covers my career.

**Kirk Chisholm** (2:49)
Sounds like you're in some of the cooler places in the evolution of mortgages, especially in the more securities where things got really interesting in 2008 How was that environment going from, as the big short movie says, going from sleepy mortgages to this really more exciting securitization process?

**Michael Youngblood** (3:11)
I wouldn't describe it as being sleepy mortgages. I would describe it as going from exciting to terrifying.
Since you bring up the timeline, the decisive turning points was the increase in delinquency rates in the first quarter of 2008 In fact, from January through April of that year, default rates on non-prime mortgage loans or subprime mortgage loans increased by 1% each month. We were all shell shocked. No one, not even the Mortgage Prize winners active in US housing finance, anticipated that.

**Kirk Chisholm** (4:03)
Sounds like some of the problems were people didn't anticipate anything going wrong. In your opinion, what was it that led people to completely miss this obvious data points that are showing up until much, much later?

**Michael Youngblood** (4:19)
Oh, house prices. The US housing market had never seen year-over-year declines in house prices until mid-2007.
And then we had six months or so of slowly declining rates of increase. And then when we broke into 2008, we had our first year-over-year declines in house prices. And that changed everything.

**Kirk Chisholm** (4:52)
Did house prices decline in the in the S&L crisis? Or was that totally banking related?

**Michael Youngblood** (4:58)
House prices did not decline in the S&L crisis. In fact, during the S&L crisis, we were in the midst of the prolonged Reagan expansion.
We didn't have our first downturn until, I believe, mid-1990, when we had a very short eight-month economic correction, where we had negative nominal and real GDP growth.
So the thrift crisis was really related to two forces. One, the interest rate imbalance of thrift institutions, and two, the liberalization of lending practices starting in 1981 and 1982 So, thrifts got involved in all sorts of activities, primarily commercial real estate, but also high-yield bonds in which they had no historical expertise. They lacked the professional staff to evaluate and manage these assets and to make matters much worse, their regulators, the national regulators, the state regulators didn't have the staff or the expertise to evaluate these new investments either. And so, you had a collapse of institutions because they were borrowing at higher rates than their mortgages were yielding. And then you had the failure of new asset classes, commercial real estate and so on. In fact, the commercial real estate crisis was one of the crises that was artificially engineered by the US government.