Nastalgia: 3-6-3 and the Federal Reserve

Barron’s has issued an insightful article on the mortgage market back in its apogee.

Back when thrift institutions were the main provider of home mortgage loans, it was said their executives had a very specific management strategy. Long before there was Six-Sigma, thrift managers had perfected the Three-Six-Three System. That could be summarized as paying 3% on deposits, make mortgages at 6%, all so they could be on the first tee by 3 PM.

Those were the halcyon days of the mortgage business. Thrifts could count on an assured profit margin between the cost of deposits, which were capped by regulators, and simple, fixed-rate loans that, more often than not, went to customers the thrift’s officers knew personally. And after 30 years, the loan would be paid off. But that’s been relegated to sepia-toned memories of when gentlemen wore ties and jackets, even to ball games, and for ladies they opened doors to big cars with tailfins.

Of course, the mortgage market has been transformed in ways of those 3-6-3 bankers could never imagine. Mortgages have become “products” that are sold and repackaged as securities. Then they were sliced and diced in ways that defied comprehension, so that subprime loans got turned into triple-A-rated derivatives. And we know what happened when that house of cards collapsed in 2007 and 2008.