The Housing Finance Revolution

32 Pages Posted: 22 Oct 2009  

Richard K. Green

University of Southern California - Lusk Center for Real Estate

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate

Date Written: August 1, 2007

Abstract

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.

Keywords: 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

JEL Classification: G21, K11, K22

Suggested Citation

Green, Richard K. and Wachter, Susan M., The Housing Finance Revolution (August 1, 2007). U of Penn, Inst for Law & Econ Research Paper No. 09-37. Available at SSRN: https://ssrn.com/abstract=1491688 or http://dx.doi.org/10.2139/ssrn.1491688

Richard K. Green

University of Southern California - Lusk Center for Real Estate ( email )

Los Angeles, CA 90089
United States

Susan M. Wachter (Contact Author)

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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