Overleveraged from Main Street to Wall Street

I have great, great confidence in our capital markets and in our financial institutions. Our financial institutions, banks and investment banks, are strong. Treasury Secretary Henry Paulson March 16, 2008 CNN The financial security of all Americans depends on our ability to restore our financial institutions to a sound footing. Treasury Secretary Henry Paulson September 19, 2008 Press release We are going through a financial crisis more severe and unpredictable than any in our lifetimes....

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Sources Inside Mortgage Finance, S amp P, Milken Institute. Note Home mortgage originations for Q1-Q3 2008 are annualized. declined once again to 3.0 trillion in 2006 and still further to 2.4 trillion in 2007 as the mortgage market meltdown occurred. In the first three quarters of 2008, originations totaled only 490 billion, 445 billion, and 300 billion, respectively. During the surge in home mortgage originations, some lenders began soliciting hard for new loans and relaxing their underwriting...

The Collapse Begins

2007 2008 Dow Jones High

By mid-2007, it was clear that the housing market had fallen into real distress. The most obvious sign, illustrated in Figure 3.22, was a long, steep plunge in home prices, as chronicled by the two S amp P Case-Shiller home price indexes. Falling prices unleashed a cascade of consequences. Many homeowners especially those who bought near the end of the boom now found themselves under water owing more than their home's current market value . Without equity, borrowers with ARMs were unable to...

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Inside Mortgage Finance Subprime

Sources Inside Mortgage Finance, Milken Institute. Note Each bar represents the cumulative share of all subprime mortgage originations securitized starting in 1994 and continuing through the third quarter of 2008. that were securitized steadily increased, from 44.7 percent to 67.8 percent in 2007, before declining to 67.5 percent in the third quarter of 2008. Although the most recent decline appears to be quite small, the percentage of subprime mortgage loans originated in the first quarter of...

List of Illustrations

Figure 2.1 Three of Five Housing Units Are Owner Figure 2.2 Mortgage Debt Enables Homeownership and Leads to Wealth Accumulation Quarterly, 1952-Q2 2008 11 Figure 2.3 In 2008, Mortgage Debt Accounts for More than 50 Percent of the Value of Housing Stock Quarterly, 1952-Q2 2008 12 Figure 2.4 Value of Housing Units How Much Has Been Borrowed, Who Are the Borrowers, and Who Funds Them Q2 2008 13 Figure 2.5 Sources of Funding for Residential and Commercial Mortgages Q2 2008 14 Figure 2.6 Types of...

Info

Sources Federal Reserve, Milken Institute. Figure 2.3 In 2008, Mortgage Debt Accounts for More than 50 Percent of the Value of Housing Stock Quarterly, 1952-Q2 2008 Figure 2.3 In 2008, Mortgage Debt Accounts for More than 50 Percent of the Value of Housing Stock Quarterly, 1952-Q2 2008 Figure 2.4 illustrates the relationship between the housing and mortgage markets. It shows the total value of all housing units broken down by the types of mortgages supporting them prime or subprime and by the...

Overview of the Housing and Mortgage Markets

It has been a long-standing public policy to promote homeownership for all socioeconomic and racial groups across the nation. To facilitate the purchase of homes, a variety of financial instruments and institutions have come into existence over the years. The myriad types of housing units and mortgage products available in the marketplace have opened the door to homeownership for millions of families, offering them the chance to steadily build wealth over a lifetime. Owning a home can bestow a...

List of Tables

Table 2.1 Homes Are an Important Component of Household Wealth, Especially for Lower-Income Families 2004 15 Table 3.1 Subprime's Importance for Home Mortgage Table 3.2 Mortgage Originations by Product Table 3.3 Growth of Hybrids in Home Mortgage Table 3.4 Net Homeownership Gain or Loss Due to Subprime Mortgage Lending Center for Responsible Lending CRL Calculations vs. Calculations Based on LoanPerformance LP Data 59 Table 3.5 Subprime Exposure of Selected Monoline Insurers Selected Years, US...

Us Mortgage

Mortgage and Credit Markets The Rise and Fall of the U.S. Mortgage and Credit Markets A Comprehensive Analysis of the Market Meltdown Tong Li Wenling Lu Triphon Phumiwasana Glenn Yago Copyright 2009 by The Milken Institute. AH rights reserved. Published by John Wiley amp Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means,...

What Is a Subprime Mortgage and Who Is a Subprime Borrower

Fico Scores Percent Population

How Do Regulators Characterize Subprime Borrowers By providing loans to borrowers who do not meet the credit standards for borrowers in the prime market, subprime lending can and does serve a critical role in the nation's economy. These borrowers may have blemishes in their credit record, insufficient credit history or non-traditional credit sources. Through the subprime market, they can buy a new home, improve their existing home, or refinance their mortgage to increase their cash on hand....

Net par outstanding trillion

Structured finance 2.2 trillion Public finance 1.3 trillion International other asset-backed securities 19 International other asset-backed securities 19 Source Association of Financial Guaranty Insurers. U.S. other asset-backed securities 45 Source Association of Financial Guaranty Insurers. The case of home mortgages that are securitized by private-label issuers is different. Instead of receiving real or implied government backing, these securities have typically been guaranteed by monoline...

Chapter Overleveraged from Main Street to

Chapter 2 Overview of the Housing and Mortgage Low Interest Rates Contribute to Credit Boom and Record Homeownership Rates 29 Mortgage Originations, Home Prices, and Chapter 3 Buildup and Meltdown of the Mortgage 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...

Low Interest Rates Contribute to Credit Boom and Record Homeownership Rates

The government has always stressed the virtues of homeownership and taken steps to promote it over the years. But while homeownership may be a worthwhile goal in and of itself, providing credit in excessive amounts to the home mortgage market leads to housing booms and busts. The increases in homeownership may therefore last only as long as the housing bubble does and the broader financial sector and economy may suffer tremendously when the bubble bursts. An important contributing factor to the...

Subprime Lending Grows Rapidly and New Products Gain Acceptance

The rapid growth of subprime lending is a relatively recent phenomenon, even though such mortgages have been around for some time. Figures 3.4 and 3.5, respectively, show that subprime home mortgage originations increased dramatically, from 160 billion in 2001 to 625 billion in 2005. Over the same period, subprime home mortgages outstanding rose from 479 billion to 1.2 trillion. Both originations and the amount outstanding declined sharply when the housing bubble burst only 16 billion in...

Mortgage Originations Home Prices and Sales Skyrocket

The low-interest environment from 2001 to 2004, as discussed, unleashed a tsunami of demand for home mortgages. Figure 2.26 shows a decline in the one-year ARM rate, from 7.04 percent in 2000 to 3.76 percent in 2003, and a corresponding surge in the credit available for home purchases. Home mortgage originations increased from 1.0 trillion in 2000 to a high of 3.9 trillion in 2003. They then fell to 2.9 trillion in 2004 and increased to 3.1 trillion in 2005. They Figure 2.26 Low Interest Rates...

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Sources Mortgage Bankers Association, Milken Institute. Figure 3.43 Subprime ARMs Have the Worst Default Record Quarterly, Q2 1998-Q2 2008 Home mortgage loans delinquent or in foreclosure percentage of number 35 Figure 3.44 Foreclosures Are Nothing New But Their Numbers Have Doubled Quarterly, Q2 1999-Q2 2008 Thousands of foreclosures per year 2,150 Average 1,316,220 annual forclosures from Q3 2006 to Q2 2008 Average 661,362 annual foreclosures from Q2 1999 to Q2 2006 Sources Mortgage Bankers...