Great American Housing Bubble: What Went Wrong and How We Can Protect Ourselves in the Future

The American housing bubble of the 2000s caused the worst global financial crisis since the Great Depression. Adam Levitin and Susan Wachter's book "The Great American Housing Bubble" explains how the shift from securitization by Fannie Mae and Freddie Mac to private-label securitization by Wall Street banks led to a race to the bottom in mortgage underwriting standards, resulting in an oversupply of underpriced mortgage finance that drove up home prices unsustainably. They propose a rebuild of the housing finance system to ensure the widespread availability of the thirty-year fixed-rate mortgage while preventing underwriting competition and shifting risk away from the public to private investors.

Format: Hardback
Length: 400 pages
Publication date: 26 June 2020
Publisher: Harvard University Press

The American housing bubble of the 2000s, a defining moment in global financial history, resulted in the worst global financial crisis since the Great Depression. In this comprehensive account, Adam Levitin and Susan Wachter shed light on its origins, attributing it to the shift in mortgage financing from securitization by Fannie Mae and Freddie Mac to "private-label securitization" by Wall Street banks. This change led to a race to the bottom in mortgage underwriting standards, as banks competed for market share by offering lax lending practices.

The Great American Housing Bubble delves into the transformation of mortgage lending, from a local, short-term affair characterized by interest-only "bullet" loans to a robust, national market centered around the thirty-year fixed-rate mortgage, a uniquely American innovation that formed the backbone of the middle class. Levitin and Wachter illustrate how Fannie and Freddie's market power initially kept risk in check until 2003, when mortgage financing underwent a significant shift towards private-label securitization. Lenders sought ways to maintain lending volume after an unprecedented refinancing wave, resulting in the return of bullet loans with lower initial payments but heightened back-loaded risks. This oversupply of underpriced mortgage finance drove up home prices unsustainably, leading to the eventual burst of the bubble and a devastating downward spiral of home prices and foreclosures.

In response to this crisis, Levitin and Wachter propose a rebuilding of the housing finance system that prioritizes the widespread availability of the thirty-year fixed-rate mortgage while preventing underwriting competition and shifting risk away from the public to private entities. They argue that such a reform would ensure stability and resilience in the housing market, protecting homeowners and preventing another financial meltdown.

The American housing bubble of the 2000s serves as a cautionary tale of the consequences of unchecked. It highlights the importance of regulatory oversight, responsible lending practices, and a balanced approach to mortgage financing. By understanding the origins.

Weight: 770g
Dimension: 167 x 242 x 41 (mm)
ISBN-13: 9780674979659