Podcast: Subprime Crisis—What's Really Going On?
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Overextended borrowers and economic woes are not the only culprits—lenders and investors are also to blame, says Robert Van Order, adjunct professor of finance and real estate, and an expert on real estate markets and mortgage securitization. He has served as chief economist at Freddie Mac, the government-sponsored enterprise chartered by Congress in 1970 to provide liquidity, stability and affordability to the housing market.
In the following Q&A and audio podcast, Van Order shares his perspective on the subprime crisis and reveals what direction his future research is likely to take.
What are you thinking about?
I am looking at the subprime crisis and, more broadly, the securitization of the mortgage markets. There's actually much less data available than opinions about what's been happening in the markets since 2006.
Why is this interesting to you?
Well, on the surface, it appears the crisis was caused by loans originated in the last few years and, specifically, by adjustable-rate loans. But the upward rate adjustments are not the main problem, because a large share of the defaults occurred before those adjustments. In light of this, and now with the recent declines in interest rates, proposals to freeze rate increases are not likely to be helpful, and will probably do more harm than good, if enacted. The loans that have performed the poorest were originated by lenders to get fees, sometimes fraudulently, and loan quality suffered greatly. Although it's true that subprime adjustable-rate mortgages seem to have attracted people who default frequently, something more was happening in terms of the way these loans were originated and pushed onto securities investors. Those investors didn't seem to understand the increased risk they were taking. The interesting question is why.
What implications do you see for the financial industry?
Fallout from the subprime crisis could affect the structure of financial markets. The ability to go straight to the capital market through securitization has become problematic because many people are having second thoughts and asking, "Do I really understand what's going on?" Home mortgages are not the only products that are structured and securitized. Car loans, commercial real estate, and credit cards are, too. A number of investors now are worried about structured deals and will start to insist that loan originators keep a greater share of the losses. What they're going to want are credible financial companies that are going to be around and able to take a significant amount of the credit hit.
I'm trying to obtain data on individual home loans so we can model this information. Where were the aberrations? How much of this crisis could have been predicted? How big a factor were rate adjustments? We already have data on mortgage delinquencies and defaults by state, month, and product, so we can tell if the loans were subprime. But if we can procure data on individual loans, we can find out who the lender was and how much the lender mattered. Did this happen systematically by lenders? My conjecture is that it did.
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