Rise and Fall of the US Mortgage and Credit Markets (eBook)

JAMES R. BARTH is a Senior Fellow at the Milken Institute and the Lowder Eminent Scholar in Finance at Auburn University. His research focuses on financial institutions and capital markets, both domestic and global, with special emphasis on regulatory issues. Barth was an appointee of Presidents Ronald Reagan and George H.W. Bush as chief economist of the Federal Home Loan Bank Board and later of the Office of Thrift Supervision. He has authored more than 200 articles in professional journals and has written and edited several books, including The Great Savings and Loan Debacle, The Reform of Federal Deposit Insurance, and Rethinking Bank Regulation: Till Angels Govern. Barth has been quoted in publications ranging from the New York Times to the Wall Street Journal and has appeared on broadcast programs including The McNeil/Lehrer NewsHour, Good Morning America, Moneyline, and CNBC's Closing Bell.

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

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

Chapter 7 Where Should We Go from Here? 287

Key Factors That Should Drive Reform 289

Issues for Policymakers 293

Concluding Thoughts 319

Appendix 321

Endnotes 445

Glossary 451

References 479

About the Milken Institute and General Disclaimer 507

About the Authors 509

Index 513