The Rise and Fall of the U.S. Mortgage and Credit ... - Milken Institute

Introduction
For generations, the mortgage market has efficiently and successfully extended credit to millions of families,
enabling them to achieve the American dream of owning their own homes. Indeed, the homeownership rate
reached a record high of 69.2 percent in the second quarter of 2004. The growth of subprime mortgages that
contributed to this record, moreover, meant that many families or individuals deemed to be less creditworthy
were provided with greater opportunities to purchase homes.
Unfortunately, a system born of good intentions veered horribly off track, derailed by poor risk-management
practices, too many assets funded with too little owner-contributed equity, and lax regulatory oversight.
In the past, the vast majority of mortgages were more carefully vetted and extended on more stringent terms by
neighborhood savings and loans, institutions that originated, held, and serviced these loans throughout their
lifetimes. But in recent years, the mortgage industry increasingly moved toward securitization (that is, packaging
mortgages into securities and selling them into the secondary market, thereby shifting credit risk).
Mortgage debt
$10.6 trillion
Equity in housing
units $8.7 trillion
Figure 1: Value of housing units: How much has been borrowed,
who are the borrowers, and who funds them? (Q2 2008)
Total value of housing
units = $19.3 trillion
Subprime
8.4% Securitized
59%
Prime
91.6%
1
Nonsecuritized
41%
Governmentcontrolled
46%
Sources: Federal Reserve, Milken Institute.
Note: The share of mortgage debt that is controlled by the government and by the private sector is based on Q3 2008 data.
Private
sectorcontrolled
54%