Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market

Copyright Date: 2009
Edition: 1
Published by: Cornell University Press
Pages: 272
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  • Book Info
    Book Description:

    In 2007 and 2008, the United States has observed, with some horror, the explosion and collapse of entire segments of the housing market, especially those driven by subprime and alternative or "exotic" home mortgage lending. Foreclosed explains the rise of high-risk lending and why these newer types of loans-and their associated regulatory infrastructure-failed in substantial ways. Dan Immergluck narrates the boom in subprime and exotic loans, recounting how financial innovations and deregulation facilitated excessive risk-taking, and how these loans have harmed different populations and communities.

    Immergluck, who has been working, researching, and writing on issues tied to housing finance and neighborhood change for almost twenty years, has an intimate knowledge of the promotion of homeownership and the history of mortgages in the United States. The changes to the mortgage market over the past fifteen years-including the securitization of mortgages and the failure of regulators to maintain control over a much riskier array of mortgage products-led, he finds, inexorably to the current crisis.

    After describing the development of generally stable and risk-limiting mortgage markets throughout much of the twentieth century, Foreclosed details how federal policy-makers failed to regulate the new high-risk lending markets that arose in the late 1990s and early 2000s. The book also examines federal, state, and local efforts to deal with the mortgage and foreclosure crisis of 2007 and 2008. Immergluck draws upon his wealth of experience to provide an overarching set of principles and a detailed set of policy recommendations for "righting the ship" of U.S. housing finance in ways that will promote affordable yet sustainable homeownership as an option for a broad set of households and communities.

    The 2011 paperback edition features a new preface by the author addressing the ongoing global economic crisis and the impact of U.S. financial reform efforts on the mortgage system.

    eISBN: 978-0-8014-5882-8
    Subjects: Political Science

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. List of Figures
    (pp. vii-viii)
  4. Preface to the Paperback Edition
    (pp. ix-xxviii)
  5. Housing Finance, Ideology, and the Rise of High-Risk Mortgage Markets
    (pp. 1-16)

    This book is about residential mortgage markets and public policy. It describes the development and regulation of institutional mortgage markets—lending by banks, savings and loans, mortgage companies, and other organizations—over the last one hundred years, with a particular emphasis on changes from the 1990s through much of 2008. Unlike many treatments of financial services regulation or policy, however, the perspective of this book is focused very much on the effects of housing finance on homeowners and their neighborhoods and communities. The effects of mortgage market problems on the broader economy became painfully obvious in late 2007 and 2008,...

  6. 1 U.S. Mortgage Market Development and Federal Policy to the Early 1990s
    (pp. 17-46)

    To understand how the mortgage market problems of the 1990s and 2000s developed, and how fundamentally different these markets functioned compared to earlier periods, it is helpful to look much further back to the evolution of home finance in the United States, particularly the origins and institutionalization of loan products such as the long-term, fully amortizing, fixed-rate mortgage that became the dominant home loan of the twentieth century. The development of this product and the generally stable—but far from perfect—mortgage market that accompanied it was hardly a creature of unfettered private market innovation. Rather, it was the outcome...

  7. 2 Mortgage Market Disparities and the Dual Regulatory System in the Twentieth Century
    (pp. 47-67)

    The problems in U.S. mortgage markets during the 1990s and 2000s cannot be understood without a serious discussion of the pervasive and persistent problems of lending discrimination and redlining, problems that—in various forms—persisted throughout the twentieth century and into the twenty-first century. In this chapter I outline the history of these problems and the policy responses to them from the early part of the twentieth century to the early 1990s. Chapters 3 through 6 then cover these issues in the high-risk lending eras beginning in the 1990s. Without a sober look at the problems of disparate access to...

  8. 3 The High-Risk Revolution
    (pp. 68-98)

    As late as 2006 or even early 2007, the typical reader of a daily U.S. newspaper was unlikely to be familiar with the term “subprime mortgage.” If asked what this term meant, it is likely that she would have responded something like “a low interest-rate loan.” Yet, by the summer of 2007, the term “subprime loan” had worked its way into the everyday lexicon of many Americans. By 2008, the American Dialect Society (2008) had named “subprime” its “word of the year” for 2007, and many, if not most, Americans had acquired a substantial—if sometimes somewhat vague or only...

  9. 4 Mortgage Market Breakdown: The Contributions of Transactional Failures, Conflicts of Interest, and Global Capital Surpluses
    (pp. 99-132)

    The growing dominance of private-label and increasingly complex securitization in the late 1990s and early 2000s together with a largely hands-off regulatory response combined to create the national mortgage crisis of 2007 and 2008. This chapter explains how hypercomplex, vertically disintegrated mortgage markets led to substantial market failures in limiting lending risks at the point of origination as well as to attendant losses to investors, borrowers, and communities. These increasingly complex securitization schemes created many “transactional failures” in the relationships between different parties in the mortgage credit supply chain, such as loan originators, credit rating agencies, issuers of securities, and...

  10. 5 The Economic and Social Costs of High-Risk Mortgage Lending
    (pp. 133-166)

    High-risk mortgage lending imposes a wide array of costs—both financial and nonfinancial—on a variety of individuals, organizations, and communities. The bulk of the initial press coverage of the 2007–08 U.S. mortgage crisis revolved around financial losses suffered by parties that were involved in the lending process, especially investors and lenders and borrowers. But increasingly, as the scale and depth of the crisis became more widely understood, there was an increasing recognition that the costs of excessively risky lending are spread much more widely, across entire neighborhoods and communities where foreclosures are concentrated. Even more broadly, the 2007–...

  11. 6 High-Risk Lending and Public Policy, 1995–2008
    (pp. 167-196)

    Much of the media coverage of the 2007–08 mortgage crisis gave the impression that the problems of high-risk lending had come as a total surprise to policymakers. There was little mention of well-documented problems in the high-risk mortgage market and the decadelong policy battle over regulating subprime loans. Federal regulators were said to be “asleep at the wheel” and somehow missed this major development in credit markets (Levitt 2008.) In fact, major problems in the subprime mortgage market had been recognized as early as the 1990s, and significant policy debates had occurred continually since then.¹ The increase in subprime...

  12. Policies for Fair, Affordable, and Sustainable Mortgage Markets
    (pp. 197-224)

    Mortgage market regulation, and financial services regulation more generally, has always been highly contested in the United States (Hoffman 2001; Immergluck 2004). Even in the earliest years of the nation, various founding fathers—including Alexander Hamilton and Thomas Jefferson—debated the form of the country’s financial infrastructure and governance. They recognized the importance of credit and capital to the economic and social well-being of a nation’s citizens. Time and again, from the Panic of 1907 to the 2007–08 mortgage crisis, the country has been forced to revisit its financial systems, their fundamental structures, and the extent of public control...

  13. References
    (pp. 225-240)
  14. Index
    (pp. 241-251)
  15. Back Matter
    (pp. 252-252)