paper about MBS

In the period up to 2003 the gses dominated the

Info iconThis preview shows pages 35–38. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: In the period up to 2003, the GSEs dominated the market, but, then post 2003, non-GSE MBS more than tripled from 12% to 38% of the origination market. By 2006 and 2007, Figure 3-1 illustrates well the competitive struggle as the GSEs recovered some of their market share (and currently dominate the market completely). The housing boom that began in the late 1990s and the concomitant rise of “private label mortgage-backed securities” (PLS) shown in Figure 3-1 posed a challenge to the GSEs. This is because the PLS involved non-conforming mortgages (securitized, for instance, by investment banks) that were of lower quality than the mortgages that met the GSEs’ usual underwriting standards or were for amounts that exceeded the GSE conforming loan limit. Borrowers who might otherwise have qualified for a conforming loan were being encouraged by lenders to borrow greater amounts (pushing them into “jumbo” territory) and/or to structure their loans in ways that wouldn’t meet the GSEs’ underwriting standards (pushing them into the non- 34 conforming territory). The latter was done, for example, by the borrower’s making less than the requisite 20% down payment but not arranging for private mortgage insurance, or by getting a second mortgage loan to cover some or even all of the down payment, or by getting an initial low “teaser” interest rate but with a scheduled upward adjustment after two or three years. Figure 3-1. Growth in Mortgage Market, Securitization, and % Share of Market Source: Inside Mortgage Finance Chapter 2 described the increasingly risky mortgage profile of Fannie and Freddie from the mid 1990s through 2003. After 2003, faced with more competition and a declining market share (and, after accounting scandals in 2003 and 2004, limited in their ability to expand their portfolios and leverage), the GSEs continued to lower their underwriting standards to try to keep pace with the PLS market. While we argued in Chapter 2 that even without this “race to the bottom”, the GSEs would most likely have failed, it is certainly true that it would not have happened in such spectacular fashion and on such a scale. This chapter lays out the case. 3.1 Gold Rush The housing boom that ended in the worst financial crisis since the Great Depression was a nationwide phenomenon. It started as far back as the mid-1990s. While local housing downturns (in Boston, New York, and Los Angeles, among others) led the national house price 35 index to decline modestly between 1990 and 1995, since then house prices recorded an unprecedented run-up. The Case-Shiller 10-city index almost tripled from 77 in June 1996 to a high of 226 in June 2006 -- an increase of 11.3% per year. House price increases in some markets in Florida, Arizona, Nevada, and California were higher still....
View Full Document

{[ snackBarMessage ]}

Page35 / 151

In the period up to 2003 the GSEs dominated the market but...

This preview shows document pages 35 - 38. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online