The rise and fall of the U.S. mortgage and credit markets : a comprehensive analysis of the market meltdown

The mortgage meltdown: what went wrong and how do we fix it? Owning a home can bestow a sense of security and independence. But today, in a cruel twist, many Americans now regard their homes as a source of worry and dashed expectations. How did everything go haywire? And what can we do about it now? In The Rise and Fall of the U.S. Mortgage and Credit Markets, renowned finance expert James Barth offers a comprehensive examination of the mortgage meltdown. Together with a team of economists at the Milken Institute, he explores the shock waves that have rippled through the entire financial sector and the real economy. Deploying an incredibly detailed and extensive set of data, the book offers in-depth analysis of the mortgage meltdown and the resulting worldwide financial crisis. This authoritative volume explores what went wrong in every critical area, including securitization, loan origination practices, regulation and supervision, Fannie Mae and Freddie Mac, leverage and accounting practices, and of course, the rating agencies. The authors explain the steps the government has taken to address the crisis thus far, arguing that we have yet to address the larger issues. Offers a comprehensive examination of the mortgage market meltdown and its reverberations throughout the financial sector and the real economy Explores several important issues that policymakers must address in any future reshaping of financial market regulations Addresses how we can begin to move forward and prevent similar crises from shaking the foundations of our financial system The Rise and Fall of the U.S. Mortgage and Credit Markets analyzes the factors that should drive reform and explores the issues that policymakers must confront in any future reshaping of financial market regulations.

Praise for The Rise and Fall of the U.S. Mortgage and Credit Market

"This book is a detailed account of the financial crisis that engulfed the United States and the world starting in 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 crisis and what to do to prevent it from occurring again. Its message that the crisis was due, in substantial measure, to a failure to enforce existing regulations should give pause to those who want to suffocate the financial sector with new regulations."
—Raghuram G. Rajan, Eric J. Gleacher Distinguished Service Professor of Finance, University of Chicago Booth School of Business

"Looking beyond the excesses of mortgage lending and easy credit, the authors dig deeper to identify the underlying roots of the current problems and proffer solutions to resolve the financial crisis while carefully acknowledging the risks of an overly zealous political response and excessive new regulation. This is a foundational work to understanding the sources of the current crisis and future policy options available to resolving it."
—B. Scott Minerd, CEO and Chief Investment Officer, Guggenheim Partners Asset Management

"If you want to know what happened to the U.S. financial system in 2008, you must read this book. It provides incisive analysis, while carefully and comprehensively documenting the dramatic unfolding of the financial crisis."
—Ross Levine, James and Merryl Tisch Professor of Economics and Director of the William R. Rhodes Center for International Economics, Brown University

"From my perspective as a journalist covering the biggest financial story since the Great Depression, this scholarly and instructive examination of our current market meltdown is an indispensable resource that quickly untangles the complex matter. The author's perceptive dissection of this historic economic fiasco is supported by an impressive compilation of data and statistics that I intend to keep at my elbow."
—Jim McTague, Washington Editor, Barron's

"If you want to read one authoritative, clear, and balanced book on the subprime mortgage crisis, then read this important and timely volume by a terrific Milken Institute team of scholars. Policymakers should pay heed to their analyses and sensible recommendations."
—Robert E. Litan, Vice President of Research and Policy, Ewing Marion Kauffman Foundation, and Senior Fellow, The Brookings Institution

The mortgage meltdown: what went wrong and how do we fix it?

Owning a home can bestow a sense of security and independence-but today, in a cruel twist, many Americans now find their homes to be a source of worry and dashed expectations.

How did everything change so suddenly and dramatically? In The Rise and Fall of the U.S. Mortgage and Credit Markets, renowned economist and finance expert James Barth offers a comprehensive examination of the mortgage market meltdown and its reverberations throughout the financial sector and the real economy.

In accessible, easy-to-understand terms, Barth explains how the era of easy credit and increased risk-taking produced disastrous results for both Main Street and Wall Street. He also details the government's sweeping and historic interventions in the marketplace, which raised a host of thorny questions and created a mountain of new debt and obligations for taxpayers. Finally, Barth offers a prescription for moving forward—and for preventing similar crises from ever again shaking the foundations of our financial system.

The Rise and Fall of the U.S. Mortgage and Credit Markets: A Comprehensive Analysis of the Market Meltdown 5 Contents 9 List of Illustrations 13 List of Tables 27 Acknowledgments 35 Chapter 1: Overleveraged, from Main Street to Wall Street 37 Chapter 2: Overview of the Housing and Mortgage Markets 45 Housing Units, Mortgage Debt, and Household Wealth 45 Types of Home Mortgages 51 Two Housing Finance Models: Originate-to-Hold vs. Originate-to-Distribute 58 Low Interest Rates Contribute to Credit Boom and Record Homeownership Rates 65 Mortgage Originations, Home Prices, and Sales Skyrocket 72 Chapter 3: Buildup and Meltdown of the Mortgage and Credit Markets 77 What Is a Subprime Mortgage and Who Is a Subprime Borrower? 78 Subprime Lending Grows Rapidly and New Products Gain Acceptance 82 Subprime Mortgages Enable More Widespread Homeownership 92 Securitization Facilitates the Funding of Subprime Mortgages 97 The Housing Bubble Reaches the Breaking Point 101 The Collapse Begins 110 Chapter 4: When Will the Crisis End? 137 What Is the Damage Scorecard to Date? 138 The Pain Spreads throughout the Financial Sector and Beyond 148 When Will We Hit Bottom? 171 Chapter 5: What Went Wrong... ? 179 ... with Origination Practices and New Financial Products? 181 ... with Securitization and Rating Agencies? 189 ... with Leverage and Accounting Practices? 196 ... with Fannie Mae and Freddie Mac? 208 ... with Tax Benefits for Homeownership? 218 ... with Regulation and Supervision? 220 ... with the Greed Factor? 240 Assessing the Role of Various Factors to Explain Foreclosures 243 Chapter 6: So Far, Only Piecemeal Fixes 255 The Landscape Shifts for Lenders 256 The Federal Reserve Intervenes to Provide Liquidity and Higher-Quality Collateral 267 Congress and the White House Take Steps to Contain the Damage 285 The FDIC Takes Steps to Instill Greater Confidence in Depository Institutions 305 The Government’s Actions Drive up the Deficit 310 Chapter 7: Where Should We Go from Here? 323 Key Factors That Should Drive Reform 325 Issues for Policymakers 329 Concluding Thoughts 355 Appendix 357 Endnotes 481 Glossary 487 References 515 About the Milken Institute and General Disclaimer 543 About the Authors 545 Index 549 "The mortgage meltdown: what went wrong and how do we fix it? Owning a home can bestow a sense of security and independence. But today, in a cruel twist, many Americans now regard their homes as a source of worry and dashed expectations. How did everything go haywire? And what can we do about it now? In "The Rise and Fall of the U.S. Mortgage and Credit Markets", renowned finance expert James Barth offers a comprehensive examination of the mortgage meltdown. Together with a team of economists at the Milken Institute, he explores the shock waves that have rippled through the entire financial sector and the real economy. Deploying an incredibly detailed and extensive set of data, the book offers in-depth analysis of the mortgage meltdown and the resulting worldwide financial crisis. This authoritative volume explores what went wrong in every critical area, including securitization, loan origination practices, regulation and supervision, Fannie Mae and Freddie Mac, leverage and accounting practices, and of course, the rating agencies. The authors explain the steps the government has taken to address the crisis thus far, arguing that we have yet to address the larger issues. The book offers a comprehensive examination of the mortgage market meltdown and its reverberations throughout the financial sector and the real economy; explores several important issues that policymakers must address in any future reshaping of financial market regulations; and, addresses how we can begin to move forward and prevent similar crises from shaking the foundations of our financial system. "The Rise and Fall of the U.S. Mortgage and Credit Markets" analyzes the factors that should drive reform and explores the issues that policymakers must confront in any future reshaping of financial market regulations."--The Publisher