Mortgage Financing in the Housing Boom and Bust

Mortgage Financing in the Housing Boom and Bust

Over the boom period, however, the traditional methods of mortgage finance were undergoing a series of dramatic changes. While mortgages had been fixed- or adjustable- rate in the past, nontraditional products, such as hybrid adjustable- rate mortgages (ARMs) and negative amortization contracts, appeared on the scene. Previously rare mortgage products, such as low documentation loans, became commonplace. Borrowers now faced challenging decisions about what type of mortgage was right for them. These new products were financed largely through the expansion of private label securitization, which developed its own set of guidelines, norms, and participants beyond the scope of Fannie Mae and Freddie Mac (the government sponsored enterprises, or GSEs). The share of subprime mortgages in total originations increased from 6 percent in 2002 to 20 percent in 2006. As of 2006, the value of US subprime loans was estimated at $1.5 trillion, or 15 percent of the $10 trillion residential mortgage market. And yet, just as quickly as these changes occurred, the mortgage market has reverted back to “conservative” underwriting standards, products, and financing in the current post- crisis environment.

Benjamin J. Keys, Tomasz Piskorski, Amit Seru, and Vikrant Vig


August 2013

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