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their homes to foreclosure, because “what was good for the lending institution was also good for the borrower.” But the new securitization market threatened to change that, because once a lender sold a mortgage, it no longer had a stake in whether the borrower could make his or her payments. He concluded, “The linkage, which I support fully, between the mortgage originator and the secondary market must be built carefully and appropriately…. Unless we have sound loans … we are going to find that the basic product we are trying to enhance and multiply will turn out soiled.”
    While securitization appeared to be alchemy, it wasn’t, in the end, a magic trick. All the risks inherent in mortgages hadn’t disappeared. They were still there somewhere, hidden, lurking in a dark corner. Dick Pratt, who had left the Federal Home Loan Bank Board to become the first president of Merrill Lynch Mortgage Capital, used to put it this way: “The mortgage is the neutron bomb of financial products.”
    There was one final consequence. After the REMIC battle, Wall Street realized it was never going to dislodge Fannie and Freddie from their dominant position as the securitizers of traditional mortgages. If it hoped to circumvent the GSEs and keep all the profits to itself, Wall Street would have to find some other mortgage product to securitize, products that Fannie and Freddie couldn’t—or wouldn’t—touch. As Maxwell later put it, “Their effort became one to find products they could profit from where they didn’t have to compete with Fannie.”
    He added, “That’s ultimately what happened.”

2
“Ground Zero, Baby”
     
    T he birth of mortgage-backed securities didn’t just change Wall Street and the GSEs. It changed the mortgage business on Main Street, too. Mortgage origination—that is, the act of making a loan to someone who wants to buy a home—had always been the province of the banks and the S&Ls, which relied on savings and checking accounts to fund the loans. Securitization mooted that business model.
    Instead, securitization itself became the essential form of funding. Which meant, in turn, that all kinds of new mortgage companies could be formed—companies that competed with banks and S&Ls for mortgage customers, yet operated outside the banking system and were therefore largely unregulated. Not surprisingly, these new companies were run by men who were worlds apart from the local businessmen who ran the nation’s S&Ls and banks. They were hard-charging, entrepreneurial, and intensely ambitious—natural salesmen who found in the changing mortgage market a way to make their mark in American business. Some of them may have genuinely cared about putting people in homes. All of them cared about getting rich. None of them remotely resembled George Bailey.
    These new mortgage originators were of two distinct breeds—at least at first. One set of companies originated fairly standard loans to people with good credit, which they sold to Fannie and Freddie; Countrywide Financial was a good example of that kind of company. The second group had very different roots. They grew out of what was known as hard-money lending—lending made to poor people, primarily. (“Hard money” refers to the large down payments its customers had to make, even for a basic item such as a refrigerator.) These new companies moved hard-money lending into the mortgage market, making loans that would eventually become known assubprime. They couldn’t sell to the GSEs, because, for a long time, the GSEs wouldn’t buy such risky mortgages. On the other hand, this influx of new lenders created exactly what Wall Street had been searching for: mortgage products it could securitize without Fannie and Freddie.

     
    There is much irony in the fact that Countrywide Financial began life in that first group of companies, since it would later become the mortgage originator most closely associated with the excesses of the subprime business. But