Index
A
Aaa-rating, 183
ABS CDO (asset-backed security collateralized debt obligation), 119
ABX, leverage, 126
adjustable-rate mortgages, 16
American Association of Residential Mortgage Regulators, 149
American Dream Down Payment Act, 153
American financial system, 113-116
responsibility, 128-129
appraisals, 17
ARMs (adjustable-rate mortgages), 16, 70-72
first-time home buyers, 57
versus fixed-rate mortgages, 39-43
asset bubbles, preventing the next crisis, 267-268
asset prices, effect of interest rates on, 244-246
asset pricing
consumer spending, effect of, 243-245
rise in, 244
asset-backed conduits, 122
asset-backed security collateralized debt obligation (ABS CDO), 119
assets, toxic assets, 225
FDIC, 226
AU (automated underwriting) models, 110
auctions, 184
automated underwriting (AU) models, 110
automated valuation models (AVM), 110
AVM (automated valuation models), 110
B
Bair, Sheila, 159
Bank of Japan, 255
banking, difficulties caused by subprime mortgage crisis, 23-24
banking industry, economic consequences of subprime mortgage crisis on, 251-253
bankruptcies, mortgages, 223
banks, central banks, 89-91
Japan, 91
Basel Accords, 122
Bear Stearns, 26, 169, 187, 207, 251
Bear Stearns hedge funds, 126
Beazer, 137
benchmark lending rates, 73
Bernanke, Ben, 157
bond insurance, 183
bond insurers, difficulties caused by subprime mortgage crisis, 24-25
booms, home building, 134-140
broker dealers, 25
liquidity, 25-26
bubbles, 74
asset bubbles, 268
housing bubble. See housing bubble
budget for federal government, preventing the next crisis, 269-270
busts
housing bust. See housing bust
buying binges, 77-80
C
capital structure, 117
cash-out refinancing, 237
CDOs (collateralized debt obligations), 13, 119-121
diversification, 127-128
CDOs-cubed, 121
CDOs-squared, 121
central banks, global investors, 89-91
Japan, 91
China, 10
global investors, 83-87
Christmas 2008, 31
CMBS (commercial mortgage-backed securities), 181
collateralized debt obligation. See CDOs
commercial mortgage-backed securities (CMBS), 181
commodity prices, rise of, 241-242
Community Reinvestment Act (CRA), 152
competition, mortgage brokerage firms, 108-109
Conference of State Bank Supervisors, 149
construction of new houses, reduction of, 236
decline of, 234
effect on asset pricing, 243-245
corporate bonds, 180-181
cost of stabilizing the economy, 227-231
covenant-lite bonds, 180
CRA (Community Reinvestment Act), 152
credit cards, securitization, 115
credit crunch, 191-192, 201-202
liquidity, 187
credit default swap market, 25
credit default swaps, 252
credit freeze, 30-31
credit scores, 37
crisis, preventing, 258
asset bubbles, 267-268
budgets for federal government, 269-270
expanding data collection, 260-261
financial transparency and accountability, 263-264
investing in financial literacy, 262-263
modifying mark-to-market accounting, 258-259
reform foreclosure process, 261-262
regulation, 266-267
reinstating the uptick rule, 259-260
securitization, 265-266
Crossman, 137
D
data collection, preventing the next crisis, 260-261
debt, rise of, 246-248
deed in lieu, 173
deficiency judgments, 262
Del Webb, 137
depositories, 105
discount window borrowing, 201
diversification, 127
CDOs, 127-128
dollar (U.S.), weakening of, 240-242
down payments, 43
E
economic stimulus. See stimulus
economy, cost of stabilizing, 227-231
emerging economies, global investors, 87-88
equity, 53
negative equity, 158
reduction of, 238
equity tranches, securitization, 118
F
failure, Federal Reserve’s regulatory failure, 154-156
economic stimulus, 209-211
Fannie Mae (Federal National Mortgage Association), 35
FDIC (Federal Deposit Insurance Corporation), 148, 215, 254
toxic assets, 226
federal funds rate, 216
Federal Home Loan Bank (FHLB), 55
Federal Housing Administration (FHA), 49
Federal Housing Administration (FHA) Secure, 196, 221
Federal Open Market Committee (FOMC), 202
Federal Reserve, 18
cracking down on non-traditional mortgage lending, 157-159
discount window, 201
monetary toolbox, 202, 206-209
policymaking in crisis_255
printing money, 216-218
regulatory failure, 154-156
Federal Reserve Board, 56, 148
Federal Trade Commission, 149
FHA (Federal Housing Administration), 49
FHA (Federal Housing Administration) Secure, 196, 221
FHCs (financial holding companies), 148
FHLB (Federal Home Loan Bank), 55
FICO scores, 37
finance companies, 115
financial guarantors, 182-185
financial holding companies (FHCs), 148
financial innovation, 10-13
financial literacy, preventing the next crisis, 262-263
financial panic, 26-30
financial stability plan, 224-227
financial systems, American financial system, 113-116
responsibility, 128-129
financial transparency and accountability, preventing the next crisis, 263-264
first-mortgage cram-downs, 223-224
first-time home buyers, 56-58
ARMs, 57
fixed-rate mortgages, 217
versus ARMs, 39-43
FOMC (Federal Open Market Committee), 202
food prices, rise of, 241-242
Hope Now, 197
preventing the next crisis, 261-262
foreclosure mitigation, 221-224
foreign investors, 81
economic stimulus, 209-211
G
GDP (gross domestic product), effect of subprime mortgage crisis on, 236
Geithner, Timothy, 224
gilts (gilt-edged securities), 179
global investors, 81-83
central banks, 89-91
China, 83-87
emerging economies, 87-88
liquidity, 91-94
global money markets, difficulties caused by subprime mortgage crisis, 22-23
government
missteps, 214-216
Lehman Brothers, 213
TARP, 214-215
policymaking during crisis, 253-257
government mortgages versus private mortgages, 34-36
government tax receipts, reduction of, 236-237
government-supported mortgage lenders, 109
Gramlich, Edward, 155
Gramm-Leach-Bliley bill, 155
Great Depression, 253-254
Great Moderation, 93
Greenspan put, 73-75
ARMs, 71
bench mark lending rates, 73
bubbles, 74
deflation, 76-77
Gresham’s law, 106-109
H
HAMP (Home Affordable and Modification Plan), 257
hedge funds, leverage, 126
HMDA (Home Mortgage Disclosure Act), 261
HOEPA (Home Ownership and Equity Protection Act), 155
Home Affordable and Modification Plan (HAMP), 257
home appraisers, 17
home builders, part in housing boom, 19-20
booms, 134-140
flippers, 142
home surpluses, 141-144
mergers, 137
options, 138
publicly-traded companies, 131-133
home equity lines of credit, 237
Home Mortgage Disclosure Act (HMDA), 261
home ownership, 49-51
first-time home buyers, 56-58
ARMs, 57
flippers, 63-65
incentives for, 53-56
investors, 60-63
rates for, 51
spending on, 52-53
trade-up buyers, 59-60
Home Ownership and Equity Protection Act (HOEPA), 155
home sales prices, reduction of, 235-236
home-equity line of credit, 79
home-equity loans, 115
homeowners’ net worth, reduction of, 237-240
homeownership, politics of, 152-154
Hope for Homeowners, 256
response of policymakers to financial shock, 197
household debt, rise of, 246-248
household spending. See consumer spending
housing boom, 13-15, 135-140, 161-163
underwriting collapses, 16-17
housing bubble, 163-165
overvalued houses, 165-166
housing busts, 16, 135-143, 166-169
housing crash, 169-171
bottom of, 170-173
housing crisis. See subprime mortgage crisis
housing prices, reduction of, 251
housing starts, reduction of, 236
housing valuation, 165-166
I
immigration, housing boom, 162
incentives for home ownership, 53-56
inflation, 218
risk of in 2007, 195
infrastructure spending, 220
innovation, financial innovation, 10-13
insurance
bond insurance, 183
for insurers, 182-185
interest on mortgages, taxes, 54
interest rates, effect on asset prices, 244-246
interest-only ARMs, 42
Internet, 139
affect on mortgage brokerage firms, 106
investors, 105
emerging investors, 87-88
global investors, 82
home ownership, 60-63
J
Japan, central banks, 91
purchase of Bear Stearns, 208
junk bonds, 180-181
K
Kennedy, Joseph, 260
L
lenders
government-supported mortgage lenders, 109
models for lending, 110-112
mortgage bankers or brokers, 100
mortgage brokerage firms, 106-108
competition, 108-109
Internet, 106
mortgage lenders, 101, 105-106
mortgage servicers, 101
mortgage underwriters, 101-104
part in housing bust, 20-21
residential mortgage lending, 97-99
ABX, 126
reducing, 188-190
liars’ loans, 17
LIBOR (London Interbank Offered Rate), 177, 201
liquidity
broker dealers, 25-26
credit crunch, 187
global investors, 91-94
loan defaults, 172-173
loans
alternative-A, 45
liars’ loans, 17
piggyback loans, 43
securitized or not securitized, 45-47
stated income loans, 44
local government tax receipts, reduction of, 236-237
London Interbank Offered Rate (LIBOR), 177, 201
Long-Term Capital Management, 75
losses from subprime financial shock, 175-176
M
manufactured-home loans, 115
margin calls, 186
mark to market, 188
mark to model, 189
mark-to-market accounting, 258-259
mergers, home builders, 137
Merrill Lynch, 213
mezzanine tranches, securitization, 117
models
automated underwriting (AU) models, 110
automated valuation models (AVM), 110
models for lending, 110-112
monetary toolbox (Federal Reserve), 202, 206-209
money, printing (Federal Reserve), 216-218
monoline insurers, 182
moral hazard, 199
mortgage bankers, 100
mortgage brokerage firms, 106-108
competition, 108-109
Internet, 106
mortgage brokers, 100
mortgage crisis. See subprime mortgage crisis
mortgage fees, 106
mortgage lenders, 101, 105-106
mortgage rates, 69-70
ARMs, 70-72
mortgage refinancing, 78
mortgage securities markets, fall of, 21
mortgage servicers, 101
mortgage underwriters, 101-104
mortgages
bankruptcies, 223
government versus private mortgages, 34-36
refinancing, 221
residential mortgage lending, 97-99
N
NCUA (National Credit Union Association, 148
negative equity, 158
housing crash, 170-173
nest eggs, reduction of, 243-245
net worth of homeowners, reduction of, 237-240
New Century Financial, 149
new home construction, reduction of, 236
non-traditional mortgage products, 146
non-traditional mortgage lending, cracking down on, 157-159
O
Obama administration
foreclosure mitigation, 221-224
stimulus, 219-220
OCC (Office of Comptroller of the Currency), 148
Office of Thrift Supervision (OTS), 148
oil prices, rise of, 241-242
option ARMs, 42
options, home building, 138
originate-to-distribute model, 116
other real estate owned (REO), 173
OTS (Office of Thrift Supervision), 148
overvalued houses, 165-166
ownership society, 153
P
panic (financial), 26-30
Paulson, Treasury Secretary, 196
PDCF (Primary Dealer Credit Facility), 202, 209
piggyback loans, 43
policymakers
changing the rules for the mortgage industry, 109
economic stimulus, 209-211
response to financial shock, 193-195
FHA Secure, 196
Hope Now, 197
reluctance to act, 198-201
policymaking during crisis, 253-257
positive carry, 126
predatory lending, 146
trying to prevent, 153
preparing for the future, 271
prepayment penalties, 158
preventing the next crisis, 258
asset bubbles, 267-268
budgets for the federal government, 269-270
expanding data collection, 260-261
financial transparency and accountability, 263-264
investing in financial literacy, 262-263
modifying mark-to-market accounting, 258-259
reform foreclosure process, 261-262
regulation, 266-267
reinstating the uptick rule, 259-260
securitization, 265-266
price-to-rent ratio, 166
Primary Dealer Credit Facility (PDCF), 202
prime versus subprime, 36-39
printing money, Federal Reserve, 216-218
private mortgages versus government mortgages, 34-36
Project Lifeline, 256
proof of income, 44
property taxes, tax deductions, 55
publicly-traded companies, home building, 131-133
Pulte, 137
put option, 75
Q
quantitative easing, 216-217
R
rating agencies, 18-19
re-evaluating risk, 178-182
real estate investment trusts (REITs), 18, 108
recession, 30-31
as consequence of subprime mortgage crisis, 233-234
Christmas 2008, 31
redlining, 152
reducing leverage, 188-190
refinancing, 78
mortgages, 221
regulation, preventing the next crisis, 266-267
Regulation Q, 135-136
difficulties in restraining aggressive lenders, 156-157
Federal Reserve, failure of, 154-156
home ownership politics, 152-154
non-traditional mortgage products, 146
predatory lending, 145
states role in, 148
subprime lending, 147
who is responsible for what, 147-151
Reich, John, 159
REITs (real estate investment trusts), 18, 108
renters, 50
REO (other real estate owned), 173
residential mortgage lending, 97-99
residential mortgage-backed security (RMBS), 117
Resolution Trust Corporation (RTC), 114
response of policymakers to financial shock, 193-195
FHA Secure, 196
Hope Now, 197
reluctance to act, 198-201
responsibility, financial system, 128-129
risk, re-evaluating, 178-182
risk layering, 43-45
risk-based pricing model, 98
risk-weighting, 122
RMBS (residential mortgage-backed security), 117
RTC (Resolution Trust Corporation), 114
rules, changing rules for the mortgage industry, 109
S
S&L (savings and loan) crisis, 114
sales prices. See home sales prices, 235
saving rate
effect on homeowners’ net worth, 238-240
reduction of, 234-235
saving rate, 243. See also nest eggs
savings and loan (S&L) crisis, 114
SEC (Securities and Exchange Commission), 18, 108, 149
securitization, 12-13, 45-47, 114-115
credit cards, 115
overview of, 117-118
preventing the next crisis, 265-266
senior tranches, securitization, 117
shadow banking systems, 121-123
shorting, 126
SIVs (structured investment vehicles), 22, 123-125
sovereign wealth funds, 191
spending. See also consumer spending
buying binges, 77-80
on homes, 52-53
stagflation, 243
state government tax receipts, reduction of, 236-237
stated income loans, 44
stimulus, 209-211
under Obama administration, 219-220
stimulus bills, 194
structured investment vehicles, 22, 122-123
subprime versus prime, 36-39
subprime financial shock, 21-22, 175
length of, 177
losses from, 175-176
triggers of, 178
subprime lending, 147
subprime mortgage crisis, economic consequences of
banking industry, effect on, 251-253
consumer spending, effect on asset prices, 243-245
debt, rise of, 246-248
dollar (U.S.), weakening of, 240-242
home sales prices, reduction of, 235-236
homeowners’ net worth, reduction of, 237-240
new home construction, reduction of, 236
recession, 233-234
saving rate, reduction of, 234-235
state/local government tax receipts, reduction of, 236-237
subprime mortgages
defined, 9
outstanding debt, 48
sizing up, 47-48
surpluses, homes, 141-144
T
TAF (Term Auction Facility), 202, 216
TALF (Term Asset-Backed Securities Lending Facility), 215, 255-256
TARP (Troubled Asset Relief Program), 29, 214-215
tax rebates, 256
tax receipts for state/local government, reduction of, 236-237
taxes
mortgage interest, 54
property taxes, 55
tech-stock bubble, 73
Term Asset-Backed Securities Loan Facility. See TALF
Term Auction Facility (TAF), 202, 216
Term Securities Lending Facility (TSLF), 202
terrorism, trade-up buyers, 60
toxic assets, FDIC, 226
toxic assets, 225
trade deficit (U.S.), 241
tranches, securitization, 117
Treasury yields, decline in, 217
triggers of subprime financial shock, 178
Troubled Asset Relief Program (TARP), 29, 214-215
trust, 22
TSLF (Term Securities lending Facility), 209
U
U.S. dollar, 240
underwriters, 101-104
unemployment, 253
uptick rule, 259-260
W
Wachovia, 214
weakening of dollar (U.S.), 240-242
“the wealth effect,” 77
Wells Fargo & Company, 149, 214
World Trade Organization (WTO), 83
Y
yen carry trade, 91