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[Suresh]

According to a National Bureau of Economic Research paper by William N. Goetzmann and Frank Newmann, in the 1920s, real estate bond securitization fostered speculation and overbuilding, which led to a collapse in prices of real estate securities. That collapse may have contributed to the fall in asset prices more generally.

Makes you wonder how much of an expert Ben Bernanke is on the Great Depression.
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New York Times: In the Packaging of Loans, a Bust With Precedent

Real estate securitization was one of the great innovations in finance in the last quarter-century.
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Now, with the securitization market nearly dead, getting that market going again is vital to providing Americans with mortgage loans.
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Although few people now remember it, another wave of private securitizations once altered the real estate landscape, particularly in New York but also in Chicago and some other American cities.

That wave ended pretty much like this one did.
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The original wave of securitizations took place in the 1920s, when the United States went on the greatest building boom ever.
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Most were bonds backed by one commercial building whose construction was being financed, but there were also pools of residential mortgages. Some of the bonds included warrants for partial ownership of the building, and some were convertible into stock.

There was even something similar to the exotic C.D.O.’s, or collateralized debt obligations, that failed so spectacularly. Those securities were not directly backed by real estate, but were instead supported by other securities that had such backing. One 1920s bond was called a “collateral trust” security, with a claim on a building’s profits but not on the building itself.
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Everyone remembers the 1920s and the stock market crash of 1929, but there has been little data collected on what happened to real estate securities or even on how large a market it was. It turns out that real estate securities constituted a major market, and began to falter before stocks did.

“The breakdown in their valuation, through the mechanism of the collateral cycle, may have led to the subsequent stock market crash of 1929-30,” [William N. Goetzmann and Frank Newman] ... wrote [in a paper just released by the National Bureau of Economic Research, titled “Securitization in the 1920s”].
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From 1929 through 1931, according to data compiled by Mr. Newman, 128 buildings that were 70 or more meters in height, or about 230 feet, were completed in New York City. That was the most ever.

Over the last three years, 2007 through 2009, the figure was 87. That was the highest number in nearly 30 years.

It is notable that the record construction period continued for two years after the Depression had begun, just as cranes dotted the New York skyline last year even as the worst recession since World War II went into its second year. Big buildings take time to plan and to build. Once begun, the best course may be to finish, even if the economy offers little hope for leasing out the space.
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Real estate bond firms “generally served simultaneously as originators, underwriters and distributors,” they wrote. “Performing these three functions proved incredibly lucrative in an optimistic real estate market. So long as investors were easy to locate, bond houses could collect substantial fees for these services without having to part with much, or any, of their own capital.”

So it was for Wall Street firms that snapped up mortgage lenders earlier in the last decade. Among the biggest in mortgage origination, underwriting and distribution were Lehman Brothers and Bear Stearns.

A major difference between then and now is that most of the real estate securities issued in the 1920s went to build structures, many of which still stand and provide housing or employment. A much greater proportion of real estate securitizations in the last decade went to help people buy existing buildings, an activity that left behind no such legacy.
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If economists and regulators had recalled the securitizations of the 1920s, they might have realized that the recent boom in real estate securitizations was not what they took it to be: a result of American financial ingenuity that created ways to spread risk to those who could best afford to bear it and in the process made financing more available and less expensive.
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Suresh

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