The Rise and Fall of the US Mortgage and Credit Markets

563 Pages·2009·8.911 MB·English

by  James Barth, Tong Li, Wenling Lu

(continued f rom f ront f lap) Praise for BARTH $60.00 USA / $72.00 CAN
THE RISE AND FALL OF THE A C O M P R E H E N S I V E A N A LY S I S O F
U.S. MORTGAGE AND CREDIT MARKETS T
The author explains the steps the government has h T H E M A R K E T M E L T D O W N F
taken thus far and suggests that those actions have been “This book is a detailed account of the fi nancial crisis that engulfed the United States and the world starting in e
2007. It is written in a way that makes it widely accessible, and is a must-read for anyone who wants a primer on the or decades, the home mortgage market
piecemeal—and largely reactive, rather than proactive. R
crisis and what to do to prevent it from occurring again. Its message that the crisis was due, in substantial measure, successfully extended credit to more and more
He argues that we have yet to address the bigger and to a failure to enforce existing regulations should give pause to those who want to suffocate the fi nancial sector with
I families, enabling millions of Americans to own
more long-term issue of how to reform the structure of new regulations.” S
their own homes. In recent years, however, it became
— Raghuram G. Rajan, Eric J. Gleacher Distinguished Service Professor of Finance,
regulation and supervision to prevent a similar crisis from E
University of Chicago Booth School of Business ever more apparent that credit was expanding too rapidly
happening again. Barth also offers his own thoughts on
“Looking beyond the excesses of mortgage lending and easy credit, the authors dig deeper to identify the underlying a and too many market participants were becoming
the factors that should drive reform and explores several roots of the current problems and proffer solutions to resolve the fi nancial crisis while carefully acknowledging a
important issues that policymakers must address in any the risks of an overly zealous political response and excessive new regulation. This is a foundational work to n N The dangerously leveraged. What began as healthy growth in
understanding the sources of the current crisis and future policy options available to resolving it.” d mortgage originations and housing starts swiftly became
future reshaping of fi nancial market regulations. D
— B. Scott Minerd, CEO and Chief Investment Offi cer, Guggenheim Partners Asset Management C R I S E a N D FA L L a home price bubble. When home prices did come
“If you want to know what happened to the U.S. fi nancial system in 2008, you must read this book. It provides incisive plunging back to earth, the damage quickly spread far
JAMES R. BARTH is a Senior Fellow at the Milken analysis, while carefully and comprehensively documenting the dramatic unfolding of the fi nancial crisis.” RF
beyond the scope of the actual mortgage defaults and
Institute and the Lowder Eminent Scholar in Finance — Ross Levine, James and Merryl Tisch Professor of Economics and Director of the EA
foreclosures. Even solid companies with no connection
at Auburn University. His research focuses on fi nancial William R. Rhodes Center for International Economics, Brown University DL
to the real estate and fi nance sectors were affected as
institutions and capital markets, both domestic and “From my perspective as a journalist covering the biggest fi nancial story since the Great Depression, this scholarly L of the
and instructive examination of our current market meltdown is an indispensable resource that quickly untangles I credit markets seized up. How did this happen—and
global, with special emphasis on regulatory issues. Barth the complex matter. The author’s perceptive dissection of this historic economic fi asco is supported by an impressive T what can we do about it now?
was an appointee of Presidents Ronald Reagan and compilation of data and statistics that I intend to keep at my elbow.” of U . S . MOR T G A g e
M
George H.W. Bush as chief economist of the Federal — Jim McTague, Washington Editor, Barron’s t
h In The Rise and Fall of the U.S. Mortgage and Credit
Home Loan Bank Board and later of the Offi ce of Thrift “If you want to read one authoritative, clear, and balanced book on the subprime mortgage crisis, then read this Ae
Markets, James Barth, with the assistance of his colleagues
important and timely volume by a terrifi c Milken Institute team of scholars. Policymakers should pay heed to their
Supervision. He has authored more than 200 articles in
analyses and sensible recommendations.” RU at the Milken Institute, analyzes in detail the mortgage
and
professional journals and has written and edited several
—Robert E. Litan, Vice President of Research and Policy, Ewing Marion Kauffman Foundation, K. meltdown and the resulting worldwide fi nancial crisis.
books, including The Great Savings and Loan Debacle, and Senior Fellow, The Brookings Institution S
CREDIT MARKE T S He explains how Main Street and Wall Street alike took
The Reform of Federal Deposit Insurance, and Rethinking E
The mortgage meltdown: what went wrong and . on too much risk and too much debt in their quest for
Bank Regulation: Till Angels Govern. Barth has been T
how do we fix it? m gains, setting the crisis in motion.
quoted in publications ranging from the New York Times S
to the Wall Street Journal and has appeared on broadcast Owning a home can bestow a sense of security and independence—but today, in a cruel twist, many Americans O (cid:1)
In straightforward terms, he tells what subprime
programs including The McNeil/Lehrer NewsHour, Good now fi nd their homes to be a source of worry and dashed expectations. R
mortgages are, who subprime borrowers are, and how
Morning America, Moneyline, and CNBC’s Closing Bell. How did everything change so suddenly and dramatically? In The Rise and Fall of the U.S. Mortgage and Credit
Markets, renowned economist and fi nance expert James Barth offers a comprehensive examination of the mortgage T securitization—packaging loans into complex securities
market meltdown and its reverberations throughout the fi nancial sector and the real economy.
G and selling them in the secondary market—expanded
Jacket Image: © Jupiter Images In accessible, easy-to-understand terms, Barth explains how the era of easy credit and increased risk-taking produced
the mortgage market, but also opened the door to a
disastrous results for both Main Street and Wall Street. He also details the government’s sweeping and historic a
interventions in the marketplace, which raised a host of thorny questions and created a mountain of new debt and shifting of risk. Barth also assesses what went wrong
g
(cid:1) obligations for taxpayers. Finally, Barth offers a prescription for moving forward—and for preventing similar crises in every other critical area, including loan origination
from ever again shaking the foundations of our fi nancial system. E
practices, regulation and supervision, Fannie Mae and
Freddie Mac, leverage and accounting practices, and, of
JA M ES R. BA RT H course, the rating agencies.
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The Rise and Fall of
the U.S. Mortgage
and Credit Markets
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The Rise and Fall of
the U.S. Mortgage
and Credit Markets
A Comprehensive Analysis
of the Market Meltdown
James R. Barth
Tong Li
Wenling Lu
Triphon Phumiwasana
Glenn Yago
John Wiley & Sons, Inc.
iii
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For
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Valaiporn, and Stephanie
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Contents
List of Illustrations xi
List of Tables xxv
Acknowledgments xxxiii
Chapter 1 Overleveraged, from Main Street to
Wall Street 1
Chapter 2 Overview of the Housing and Mortgage
Markets 9
Housing Units, Mortgage Debt, and
Household Wealth 9
Types of Home Mortgages 15
Two Housing Finance Models:
Originate-to-Hold vs.
Originate-to-Distribute 22
Low Interest Rates Contribute to Credit Boom
and Record Homeownership Rates 29
Mortgage Originations, Home Prices, and
Sales Skyrocket 36
Chapter 3 Buildup and Meltdown of the Mortgage
and Credit Markets 41
What Is a Subprime Mortgage and Who Is a
Subprime Borrower? 42
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viii CONTENTS
Subprime Lending Grows Rapidly and New
Products Gain Acceptance 46
Subprime Mortgages Enable More
Widespread Homeownership 56
Securitization Facilitates the Funding of
Subprime Mortgages 61
The Housing Bubble Reaches the
Breaking Point 65
The Collapse Begins 74
Chapter 4 When Will the Crisis End? 101
What Is the Damage Scorecard to Date? 102
The Pain Spreads throughout the Financial
Sector and Beyond 112
When Will We Hit Bottom? 135
Chapter 5 What Went Wrong...? 143
...with Origination Practices and
New Financial Products? 145
...with Securitization and Rating Agencies? 153
...with Leverage and Accounting Practices? 160
...with Fannie Mae and Freddie Mac? 172
...with Tax Benefits for Homeownership? 182
...with Regulation and Supervision? 184
...with the Greed Factor? 204
Assessing the Role of Various Factors
to Explain Foreclosures 207
Chapter 6 So Far, Only Piecemeal Fixes 219
The Landscape Shifts for Lenders 220
The Federal Reserve Intervenes to Provide
Liquidity and Higher-Quality Collateral 231
Congress and the White House Take Steps to
Contain the Damage 249
The FDIC Takes Steps to Instill Greater
Confidence in Depository Institutions 269
The Government’s Actions Drive up the
Deficit 274