Transcript Slide 1

The Development of Mortgage Markets
 1950’s – A Decade of Stability
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Maturity Mismatch???
 Inflation:
 Regulation Q:
 1960’s – Creeping Inflation, Disintermediation,
and the rise of the Secondary Mortgage Market
David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University
The Development of Mortgage Markets
David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University
The Development of Mortgage Markets
 1970’s – FRM Problems with Inflation
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The “Tilt” Effect
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Supply Problems
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Continued Growth of the Secondary Market
David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University
The “Tilt” Effect
David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University
The Development of Mortgage Markets
 1980’s – Deregulation, the Growth of AMI’s,
and the Thrift Crisis
David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University
The Thrift Crisis
 Regulatory Failure:
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FSLIC Forbearance
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Additions to Net Worth
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RAP vs. GAAP Accounting
 The “Zombie” Theory
David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University
FIRREA to the Rescue???
 Changes Mandated FIRREA
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 Limitations of FIRREA
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David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University
Risk-Based Capital Guidelines
Asset
Risk Weight
Book Value
Treasuries/GNMAs
0
$2,000,000
FreddieMac/FannieMae MBS
20
$5,000,000
Residential Mortgages
50
$4,000,000
Commercial Mortgages
100
$3,000,000
Real Estate Owned (REO)
200
$1,000,000
David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University
Calculating Net Worth for S&L’s
 Period 1: 1-year market rate=7%, 30-year market rate=9%
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Assets
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Liabilities
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30-year mortgages, 9% coupon – BV=$50,000,000
Building and Land – BV=$5,000,000
1-year CDs at 1-year market rate – BV=$50,000,000
Equity = ?
 Period 2: 1-year market rate=8%, 30-year market rate=10%
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Assets:
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Liabilities:
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30-year mortgages, 9% coupon – BV=$50,000,000
Building and Land – BV=$5,000,000
1-year CDs at 1-year market rate – BV=$50,000,000
Equity = ?
David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University
The Development of Mortgage Markets
 1990’s – Dominance of the Secondary Market
 2000’s – Continued Dominance of the
Secondary Market, Development of Sub-prime
markets, and the housing crunch
David M. Harrison, Ph.D.
Real Estate Finance
Texas Tech University