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