By M. Jarsulic
An indepth examine the origins and improvement of the present monetary predicament, from an economist and Washington insider. Jarsulic explains how a wide range of economic associations, together with loan banks, advertisement banks, and funding banks created a credits bubble that supported nonprime personal loan lending and helped to inflate condo prices.
Read or Download Anatomy of a Financial Crisis: A Real Estate Bubble, Runaway Credit Markets, and Regulatory Failure PDF
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Extra resources for Anatomy of a Financial Crisis: A Real Estate Bubble, Runaway Credit Markets, and Regulatory Failure
5 percent. This sustained increase in house prices across diverse geographic markets was extraordinary. 16 For the forty-five years ending in 1997, the real value of home prices was essentially unchanged. 4 percent. 5 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Percent change in Case-Shiller national home price index, year-on-year Source: Standard & Poor's. 8 percent, for a total real increase of 85 percent. It is also notable that nominal house price appreciation began to accelerate at the end of 2002.
Depository institutions (commercial banks, thrifts and credit unions) and mortgage companies (some of which are affiliates of depository institutions) both originate mortgages. The majority of mortgages are originated by depository institutions. During 2004–2006, depositories and their subsidiaries and affiliates originated approximately 70 percent of all mortgages. The remainder was originated by independent mortgage companies, or the affiliates of investment banks or other financial firms. Mortgage originators can hold the loans in their investment portfolio, or they can sell them to others.
22 Anatomy of a Financial Crisis As a consequence mortgage brokers were free to maximize their income at the expense of subprime borrowers. Mortgage originators in fact gave brokers strong incentives to do just that. Many subprime lenders offered brokers a “yield-spread premium”—a bonus for selling a mortgage with an interest rate higher than the rate for which the borrower could qualify. The yield-spread premium generally increased when the loan included a prepayment penalty, a feature which guaranteed the lender that the premium would be recouped if the borrower paid off the mortgage.