But arguably the more important factor was the

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But arguably the more important factor was the “financial liberalization” in housing finance that was underway, making it easier to get a mortgage for first-time home buyers and making it easier and cheaper for existing homeowners to tap into the equity in their home. And there was the securitization process, which made it easier for banks to offload the mortgage loans that they issued by selling those loans to others. Any erosion of adequate pricing and controls for risk along the securitization conveyor belt meant that it would be easier for
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36 mortgage originators to lend more and “farther down the quality curve”. We explain this argument below. 3.2 It’s the Underwriting, Stupid There is no doubt that one reason for the increase in house prices clearly lies in the wider availability of mortgage credit through lower down payment requirements and lower costs that were associated with extracting equity from one’s home. Households could borrow more, and more easily, against the value of the house, and they could consume more easily out of their home equity. 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
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37 originations. Conforming mortgage originations -- the raw material of the GSE-backed loan pools -- fell from 58% to 33% of originations over this period.
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