The Rise and Fall of the US Mortgage and Credit Markets: A Comprehensive Analysis of the Market Meltdown

For decades, the home mortgage market successfully extended credit to more and more families, enabling millions of Americans to own their own homes. In recent years, however, it became ever more apparent that credit was expanding too rapidly and too many market participants were becoming dangerously leveraged. What began as healthy growth in mortgage originations and housing starts swiftly became a home price bubble. When home prices did come plunging back to earth, the damage quickly spread far beyond the scope of the actual mortgage defaults and foreclosures. Even solid companies with no connection to the real estate and finance sectors were affected as credit markets seized up. How did this happen–and what can we do about it now?

In The Rise and Fall of the U.S. Mortgage and Credit Markets, James Barth, with the assistance of his colleagues at the Milken Institute, analyzes in detail the mortgage meltdown and the resulting worldwide financial crisis. He explains how Main Street and Wall Street alike took on too much risk and too much debt in their quest for gains, setting the crisis in motion.

In straightforward terms, he tells what subprime mortgages are, who subprime borrowers are, and how securitization–packaging loans into complex securities and selling them in the secondary market–expanded the mortgage market, but also opened the door to a shifting of risk. Barth also assesses what went wrong in every other critical area, including loan origination practices, regulation and supervision, Fannie Mae and Freddie Mac, leverage and accounting practices, and, of course, the rating agencies.

The author explains the steps the government has taken thus far and suggests that those actions have been piecemeal–and largely reactive, rather than proactive. He argues that we have yet to address the bigger and more long-term issue of how to reform the structure of regulation and supervision to prevent a similar crisis from happening again. Barth also offers his own thoughts on the factors that should drive reform and explores several important issues that policymakers must address in any future reshaping of financial market regulations.

For decades, the home mortgage market successfully extended credit to more and more families, enabling millions of Americans to own their own homes. In recent years, however, it became ever more apparent that credit was expanding too rapidly and too many market participants were becoming dangerously leveraged. What began as healthy growth in mortgage originations and housing starts swiftly became a home price bubble. When home prices did come plunging back to earth, the damage quickly spread far beyond the scope of the actual mortgage defaults and foreclosures. Even solid companies with no connection to the real estate and finance sectors were affected as credit markets seized up. How did this happen and what can we do about it now?

In The Rise and Fall of the U.S. Mortgage and Credit Markets, James Barth, with the assistance of his colleagues at the Milken Institute, analyzes in detail the mortgage meltdown and the resulting worldwide financial crisis. He explains how Main Street and Wall Street alike took on too much risk and too much debt in their quest for gains, setting the crisis in motion.

In straightforward terms, he tells what subprime mortgages are, who subprime borrowers are, and how securitization packaging loans into complex securities and selling them in the secondary market expanded the mortgage market, but also opened the door to a shifting of risk. Barth also assesses what went wrong in every other critical area, including loan origination practices, regulation and supervision, Fannie Mae and Freddie Mac, leverage and accounting practices, and, of course, the rating agencies.

The author explains the steps the government has taken thus far and suggests that those actions have been piecemeal and largely reactive, rather than proactive. He argues that we have yet to address the bigger and more long-term issue of how to reform the structure of regulation and supervision to prevent a similar crisis from happening again. Barth also offers his own thoughts on the factors that should drive reform and explores several important issues that policymakers must address in any future reshaping of financial market regulations.