The Housing Finance Revolution

Article, Preprint OPEN
Richard K. Green ; Susan M. Wachter (2007)
  • Subject: Real Estate, mortgages, Housing, capital markets, securitization, mortgage security infrastructure, Liquidity, subprime mortgage-backed securities, MBS, marked to model, systemic underpricing of risk, speculation, pricing of risks, default risk, underpriced credit | Housing ; Housing - Prices ; Mortgages

While other countries dismantled their segmented housing finance systems and linked housing finance to capital markets through deregulated depositories, the US linked housing finance to capital markets through depository deregulation and securitization. Elsewhere securitization has not developed. The US provided the underpinnings for its mortgage security infrastructure with the creation of FNMA in 1938 and in order to create liquidity in the mortgage market required the standardization of mortgage documentation and more fundamentally required that home mortgages within securities would be sufficiently homogeneous that they could trade in liquid markets. These developments allowed 22 years of uninterrupted liquidity in the market for conventional conforming mortgages, to be followed by the creation of a subprime mortgage market backed by securities that were illiquid, nonstandardized and marked to model not to market which allowed systemic underpricing of risk. This paper presents the recent history of the linkage of mortgage funding to financial markets in the US and elsewhere and specifically in the US suggests how the housing finance revolution resulted in the "terror" which has brought down global financial markets.
  • References (3)

    1980 1983 1986 1989 1992 1995 1998 2001 2004 Year Sources: Bank for International Settlements House Price Index, Interest Data from U.N. Statistical Database Organisation for Economic Co-operation and Development. “2005. Consumer Price Indices for OECD Countries ( March.

    Wachter, Susan, 1990. “The Limits of the Housing Finance System.” Journal of Housing Research 1(1):163-174.

    Wachter, Susan, 2003. “Price Revelation and Efficient Mortgage Markets,” Law Review, Vol. 88(2):413-419.

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