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They responded to these new opportunities and

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Unformatted text preview: They responded to these new opportunities and massively increased their debt. Total household debt increased from 73% of GDP in the first quarter of 1996 to 111% in the fourth quarter of 2006. From 2001 to 2006, new mortgage originations totaled $18 trillion, or $3 trillion per year. Figure 3-1 above described the growth in the non-prime mortgage market from the mid 1990s on. Table 3-1 provides detailed origination data for the various segments of the mortgage market from 2001 to 2006. 17 Table 3-1: U.S. Mortgage Market Originations, 2001-2006 ($ Amounts are Billions) Con- form- ing Jumbo FHA/VA Sub- prime Alt-A HELOCs Total % ARM % Refinance % Non-prime 2001 1280 450 175 120 60 130 2215 16% 59% 14% 2002 1711 576 176 185 67 170 2885 24% 63% 15% 2003 2460 650 220 310 85 220 3945 26% 72% 16% 2004 1210 510 130 530 185 355 2920 50% 52% 37% 2005 1090 570 90 625 380 365 3120 48% 50% 44% 2006 990 480 80 600 400 430 2980 45% 45% 48% Source: Inside Mortgage Finance The development of the non-prime (low credit quality) mortgage market, including the market for home equity lines of credit, was an important aspect of this unprecedented housing credit expansion. Subprime and Alt-A mortgages were virtually non-existent before the late 1990s. 18 They opened up a new market for lower-income households, households with blemished credit records, or households with incomplete income documentation, none of which qualified for the conforming mortgages bought by the GSEs. The subprime share in originations was 8.5% in 2001-2003, but then rose rapidly to 20% in 2005-2006. Combining subprime, Alt- A, and home equity lines of credit, more than $1 trillion of non-prime mortgage debt was extended in each of 2004, 2005, and 2006. The non-prime share increased from 14% to 48% of 37 originations. Conforming mortgage originations -- the raw material of the GSE-backed loan pools -- fell from 58% to 33% of originations over this period. Many of these subprime and Alt-A loans were adjustable-rate mortgages (ARMs) with low initial teaser rates that were due to reset in 2007-2009. The overall ARM share increased from 16% to 45%. These resets were typically associated with large increases in monthly payments and would later trigger a wave of foreclosures. The expansion of mortgage credit to lower-income households was accompanied by a gradual erosion of lending standards. Combined loan-to-value (CLTV) ratios increased for both prime and non-prime loans, and for both ARMs and FRMs. There was a dramatic growth in the fraction of loans whose CLTV exceeded 80% in all three major loan categories. For prime ARMs, the fraction increased from 4.1% in 2002 to 26.2% in 2006, while for Alt-A ARMs, it increased from 20.8% to 55.5%, and for subprime ARMs from 46.8% to 64.0%. Importantly, these numbers underestimate the true problem because many houses were appraised too richly....
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They responded to these new opportunities and massively...

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