The American Mortgage System: Crisis and Reform

The American Mortgage System: Crisis and Reform

The American Mortgage System: Crisis and Reform

The American Mortgage System: Crisis and Reform

Synopsis

Successful home ownership requires the availability of appropriate mortgage products. In the years leading up to the collapse of the housing market, home buyers frequently accepted mortgages that were not only wrong for them but catastrophic for the economy as a whole. When the housing market bubble burst, so did a cornerstone of the American dream for many families. Restoring the promise of this dream requires an unflinching inspection of lending institutions and the right tools to repair the structures that support solid home purchases. The American Mortgage System: Crisis and Reform focuses on the causes of the housing market collapse and proposes solutions to prevent another rash of foreclosures.

Edited by two leaders in the field of real estate and finance, Susan M. Wachter and Marvin M. Smith, The American Mortgage System examines key elements of the mortgage meltdown. The volume's contributors address the influence of the Community Reinvestment Act, which is often blamed for the crisis. They uncover how the government-sponsored enterprises Fannie Mae and Freddie Mac invested outside the housing market with disastrous results. They present surprising information about low-income borrowers and the strengths of local banks. This collection of thoughtful studies includes extensive analysis of loan practices and the creation of unstable mortgage securities, presenting data largely unavailable until now. More than a critique, The American Mortgage System offers solutions to the problems facing the future of American home ownership, including identifying asset price bubbles, calculating risk, and preventing discrimination in lending.

Measured yet timely and by turns provocative, The American Mortgage System provides a careful assessment of a troubled but indispensable part of the economic and social structure of the United States. This book is a sound investment for economists, urban planners, and all who shape public policy.

Excerpt

Marvin M. Smith and Susan M. Wachter

Erica and James are the best of friends. They went to the same schools, grew up in the same neighborhood, and got jobs at the same company. Their spouses work together, their children play together, and their families celebrate Fourth of July together. On paper, a mortgage lender would have trouble differentiating them. They have the same household income, the same credit score, and are the same age.

But that is where their similarities end. Imagine we are in 2005: Erica pays 6.9 percent in mortgage interest each year. She can pay off the principal as early and as often as she likes, and she has no balance payable when the loan is due. James pays 8 percent interest annually. If he tries to “prepay” his mortgage principal, he gets hit with a significant prepayment penalty, and he will face a “balloon” balance at the end of his contract. Erica has a prime mortgage and James’ mortgage is subprime.

How did these nearly identical homeowners receive such divergent treatment? The answer to that question is one of the most pressing reasons that we must reinvent the American mortgage system.

Successful homeownership requires the availability of appropriate mortgage products. In the years leading up to the housing bubble, homebuyers frequently accepted mortgages that were not only wrong for them but catastrophic for the economy as a whole. When the housing market crumbled, so did a cornerstone of the American dream for many families. Restoring the promise of this dream requires an unflinching inspection of lending . . .

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