Over the years Lewis S. Ranieri has worn many hats related to financial services - bond trader, bank executive, real estate owner, opportunistic investor, and tech entrepreneur.

Last week he sat down with American Banker and shared his thoughts on a variety of subjects, including Fannie Mae and Freddie Mac (whose value he still defends fiercely), commercial property (where he sees alarming trends), data security (where he sees big opportunities), and one of his latest ventures, an auction site for mortgage leads.

Perhaps the most surprising comments from the man known as the father of modern mortgage securitization were about the way housing-related credit risk now is repackaged and passed on multiple times, and in multiple forms.

"When you start divorcing the creator of the risk from the ultimate holder of the risk, it becomes an issue of, 'Does the ultimate holder truly understand the nature of the risk that you've redistributed?' " Mr. Ranieri said. "By cutting it up in so many ways or complicating it by so many levels, do you still have clarity … on the nature of the underlying risk?"

"It's not clear that we haven't gone, in some ways, too far - that we have not gone beyond the ability to have true transparency," he said. "That is a fair question many of us in the business and people in the regulatory regime are wrestling with."

He is best known for leading the Salomon Brothers group that pioneered the repackaging of mortgages into pass-through securities in the 1980s - and later, the repackaging of such securities into collateralized mortgage obligations.

Since then securitization has mushroomed - and so has resecuritization. The lower-rate tranches of mortgage-backed bond issues are often resold into diversified collateralized debt obligations with triple-A classes, or insured by credit derivatives. CDOs are even repackaged into other CDOs.

In the interview, Mr. Ranieri stopped far short of predicting any housing-related "disasters," at least for the next two years, or reevaluating securitization's general merit.

Nevertheless, he said that a long "halcyon period" of falling long-term interest rates and booming home prices has led to dangerously carefree attitudes, even as he took a fairly agnostic stance on the possible consequences.

He said his immediate concerns are with subprime mortgages, whose securitization market he called untested by tough times, and with certain housing markets - particularly condos - where he believes a speculative frenzy was greatly underestimated. (One reason: Many "second homes" were truly bought as investments, he said.)

For the longer term, Mr. Ranieri said, the explosion of option adjustable-rate mortgages is also troubling to him.

Granted, "the potential ARM crisis that some of us have worried about … has been averted" for now by still-low long-term rates. Indeed, he said, originators should benefit greatly from ARM borrowers refinancing into fixed-rate loans, whose servicing rights are worth more, he said.

However, he added, "one day we might not get so lucky ... This is not the environment where these alternative structures are going to be tested."

In the 1990s Mr. Ranieri built BankUnited Corp. into one of the largest banking companies in Texas before selling it to Washington Mutual Inc. Today he is an investor in several companies, mostly financial ones, and chairman of several of those, including Franklin Bank Corp. of Houston, CA Inc., American Financial Realty Trust, and Five Mile Capital Partners LLC (which was part of the group that bought most of General Motors Corp.'s commercial mortgage unit last year).

He said that his bank investments today consist solely of Franklin, Signature Bank of New York, and, through his stake in CardWorks Inc., a small credit-card industrial-loan bank.

At Franklin "when competition for mortgages got to what we thought was the point of being dangerous with some of these ARM structures, we just told our shareholders we would rather make less money than be in that risk," he said.

Mr. Ranieri said he would always believe there is "an absolute correlation" between the amount of borrower equity in a home and the "frequency of delinquency and severity of loss on foreclosure." That is one reason he worries about the widespread popularity of potentially negatively amortizing option ARMs in recent years.

With home prices plateauing, subprime loans' performance will suffer the most, because the borrower cannot "de-lever" by "selling the third car or changing the way he lives temporarily," he said. The borrower is already "all the way out on a limb."

Why wouldn't the higher leverage on other loans be as worrisome? "I'm not saying all jumbo [mortgages] are good, but in general, the nature of a jumbo buyer" allows for him or her to adapt more easily than a subprime borrower in times of stress.

Mr. Ranieri said Freddie approached him about leading it after its accounting scandal surfaced a few years ago, and he demurred. What about Fannie? The government-sponsored enterprise would have better options if it ever needed a new head, he said, and he is probably "having too much fun" to accept such an offer anyway.

He passionately reiterated his belief in the value of the GSEs. Though he said he is "certainly not a fan of letting the agencies eat the world," he is sure "their role is not ephemeral, and it's baloney to say the private sector could do everything they do."

During the "Merriweather crisis," the 1998 global debt crisis linked with the collapse of John Merriweather's Long-Term Capital Management, when "almost all the markets ceased functioning, including the Treasury market," the GSEs kept the mortgage market working, he said. And, he added, "I shudder to think who would service all the smaller … [housing markets] across the United States" if the GSEs were shrunk too much and made irrelevant.

"You can't go all the way in the other direction, or you create all the problems they were created to stop," he said. "Where the balance is, I think, should be the argument."

Mr. Ranieri even argued that the GSEs are crucial to the "lower-middle-income, or blue-collar, worker," despite evidence that subprime loans have done more for such borrowers. "Until that market has been tested, until it's gone through a cycle, you can't tell me what it's doing," he said.

He also said he thinks the GSEs' dramatic loss of market share in recent years is related mainly to capital constraints caused by their regulatory woes, though other observers (and the GSEs themselves) have given different explanations.

Mr. Ranieri, who often boasts that the mortgage-securities market once existed solely in his head, acknowledged that he at times doubts his understanding of today's financial world, thinking he may be getting "too old."

Occasionally, he said, "I find myself honestly asking myself whether the experiences of my lifetime are relevant." For example, he remembers the "horrible price we paid for deficit spending" in the 1970s and 1980s. Though he thinks that long-term rates should eventually skyrocket again for the same reason, he is not sure there are not "other circumstances I'm overlooking."

Then again, he quickly added, some old principles must still hold true. For example, commercial property values have soared relative to their cash flows, as shown by the decline in capitalization rates (yields based on net operating income), even on second-rate buildings.

Mr. Ranieri would "reluctantly" tell buyers of better properties who are paying up to "be my guest," he said. "I'm not sure that the risk-reward on real estate has really sort of dramatically moved, but so be it.

"But what I'm absolutely certain of is when absolute cap rates are collapsing on zero, the relative spread between a 'B' property and a major property, an 'A' location, shouldn't be narrowing," he said. "That's madness. … It's mathematically a silly idea."

He explained he meant that since "the closer you get to zero, the more likely you are that rates will rise" later. And, if market conditions weaken, "tenants go to the best property first, and … [those properties] are able to absorb those tenants at the lowest discounts."

Mr. Ranieri spoke to American Banker at the New York headquarters of Root Markets Inc., which plans to launch a new version of its online marketplace for mortgage leads next month.

He said the lead-exchange business has the most potential of all the areas he is involved in today. With apparent sincerity, he said, "Very shortly the next sex symbol to Wall Street will be lead traders."

Root Markets was founded early last year and got into business last fall by buying Lead Filter Corp. of New York, which ran a marketplace now called Root Exchange. Mr. Ranieri is its biggest shareholder and chairman.

Most of the lead sellers that work with it are traditional aggregators, but it is also seeking to give publishers (like New York Times Co., another investor) that sell advertising to the aggregators a way to sell their own leads.

Seth Goldstein, Root's CEO, said it will also be auctioning leads "sooner than you'd think" for other financial products, such as credit cards and auto loans.

Mr. Ranieri said he also sees opportunities with "other aspects of the Web," especially online security. At one point he jumped up to demonstrate a security device for a Bloomberg LP Web site. He pressed his thumb on the pad of a device the size of a business card holder, held it to a blinking area on the computer screen, and got a login number.

The technology is now too expensive to "give every yo-yo with a credit card," he said, but it represents the future. (He would not say how he is investing in this sector.)

Earlier, while talking about what some call an overabundance of bank branches (a property type in which American Financial Realty specializes), he said, "You're not going to antiquate the branch system until you deal with, once and for all, this issue of security."

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