For generations, the mortgage market has efficiently and successfully extended credit to millions of families, enabling them to achieve the American dream of owning their own homes. Indeed, the homeownership rate reached a record high of 69.2 percent in the second quarter of 2004. The growth of subprime mortgages that contributed to this record, moreover, meant that many families or individuals deemed to be less creditworthy were provided with greater opportunities to purchase homes.
Unfortunately, a system born of good intentions veered horribly off track, derailed by poor risk-management practices, too many assets funded with too little owner-contributed equity, and lax regulatory oversight.
In the past, the vast majority of mortgages were more carefully vetted and extended on more stringent terms by neighborhood savings and loans, institutions that originated, held, and serviced these loans throughout their lifetimes. But in recent years, the mortgage industry increasingly moved toward securitization (that is, packaging mortgages into securities and selling them into the secondary market, thereby shifting credit risk).
This sweeping change provided the mortgage industry with greater liquidity, helping to make new loans accessible to more Americans at different levels of income than ever before. But by 2004, it was becoming ever more apparent that credit was expanding too rapidly, on terms that were too loose. What began as healthy growth in mortgage originations and housing starts swiftly became a home price bubble.
As home values kept escalating, many borrowers were unable to obtain loans on the basis of traditional standards. Mortgage brokers and lenders were able to keep churning out seemingly profitable mortgages in such an environment by casting their nets even wider. Soon many loans were being written on such loose terms that they made homes more affordable, at least initially, but were clearly unsustainable unless home prices continued rising. Real estate agents and many of those originating mortgages earned fees by allowing buyers with shaky credit histories and modest incomes to dive in and then passing the associated credit risk on to others. In the reach for yield, many financial institutions made questionable loans, while the regulatory authorities failed to take steps to slow things down to a more normal pace.
CONTENTS
Key Findings
Policy Recommendations
Introduction
Overview of the Housing
and Mortgage Markets
Buildup and Meltdown of
the Mortgage and Credit Markets
What Went Wrong...?
So Far, Only Piecemeal Fixes
Where Should We Go From Here?
About the Authors
