David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University

The Development of Mortgage Markets

1950’s – A Decade of Stability 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 FinanceTexas Tech University

The Development of Mortgage Markets

David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University

The Development of Mortgage Markets

1970’s – FRM Problems with Inflation The “Tilt” Effect

Supply Problems

Continued Growth of the Secondary Market

David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University

The “Tilt” Effect

David M. Harrison, Ph.D.Real Estate FinanceTexas 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 FinanceTexas Tech University

The Thrift Crisis

Regulatory Failure: FSLIC Forbearance

Additions to Net Worth

RAP vs. GAAP Accounting

The “Zombie” Theory

David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University

FIRREA to the Rescue??? Changes Mandated FIRREA

Limitations of FIRREA

David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University

Risk-Based Capital GuidelinesAsset 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 FinanceTexas Tech University

Calculating Net Worth for S&L’s Period 1: 1-year market rate=7%, 30-year market rate=9%

Assets 30-year mortgages, 9% coupon – BV=$50,000,000 Building and Land – BV=$5,000,000

Liabilities 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% Assets:

30-year mortgages, 9% coupon – BV=$50,000,000 Building and Land – BV=$5,000,000

Liabilities: 1-year CDs at 1-year market rate – BV=$50,000,000

Equity = ?

David M. Harrison, Ph.D.Real Estate FinanceTexas 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