ABOUT THIS BOOK
The definitive account of the housing bubble that caused the Great Recession—and earned Wall Street fantastic profits.
The American housing bubble of the 2000s caused the worst global financial crisis since the Great Depression. In this definitive account, Adam Levitin and Susan Wachter pinpoint its source: the shift in mortgage financing from securitization by Fannie Mae and Freddie Mac to “private-label securitization” by Wall Street banks. This change set off a race to the bottom in mortgage underwriting standards, as banks competed in laxity to gain market share.
The Great American Housing Bubble tells the story of the transformation of mortgage lending from a dysfunctional, local affair, featuring short-term, interest-only “bullet” loans, to a robust, national market based around the thirty-year fixed-rate mortgage, a uniquely American innovation that served as the foundation for the middle class.
Levitin and Wachter show how Fannie and Freddie’s market power kept risk in check until 2003, when mortgage financing shifted sharply to private-label securitization, as lenders looked for a way to sustain lending volume following an unprecedented refinancing wave. Private-label securitization brought a return of bullet loans, which had lower initial payments—enabling borrowers to borrow more—but much greater back-loaded risks. These loans produced a vast oversupply of underpriced mortgage finance that drove up home prices unsustainably. When the bubble burst, it set off a destructive downward spiral of home prices and foreclosures.
Levitin and Wachter propose a rebuild of the housing finance system that ensures the widespread availability of the thirty-year fixed-rate mortgage, while preventing underwriting competition and shifting risk away from the public to private investors.
-- Robert J. Shiller New York Times
Nothing is more important to developing community wealth and narrowing disparities than access to homeownership; this book shows a path toward establishing a sustainable and fair housing finance system, improving opportunity for all.
-- Marc H. Morial, President and CEO, National Urban League
With its combination of legal and economic expertise, The Great American Housing Bubble makes a significant contribution to our understanding of the complexities of the housing finance system. Levitin and Wachter write with an eye towards the future of housing policy, connecting their analysis of ‘what happened’ to ‘what it means.’ Their insights will be invaluable when the federal government takes on housing finance reform in earnest.
-- Carolina Reid, Faculty Research Advisor, Terner Center for Housing Innovation, University of California, Berkeley
Levitin is one of the unsung heroes of the financial crisis of 2008. In this book, he and Susan Wachter share with the reader the invaluable advice they gave so many policy makers and advocates at the time—advice that, had it been listened to, would have kept millions of families in their homes and would have brought justice to those who brought our economy to the edge of destruction.
-- Damon Silvers, Policy Director and Special Counsel, AFL-CIO, and former Deputy Chair, Congressional Oversight Panel
A brilliant book by two of the deepest thinkers on housing and housing finance. As we move forward, it is essential that we incorporate this insight and perspective into our redesign of how Americans live. In the post-virus world, there are few things more important than listening to careful analysis and reflecting on how to turn that into robust policy.
-- Simon Johnson, Ronald A. Kurtz (1954) Professor of Entrepreneurship, MIT Sloan School of Management, and cochair, COVID-19 Policy Alliance
I watched the housing market implode and the still-unfinished policy reforms unfold by comparing notes each week with these two superb analysts. Economist and lawyer, Wachter and Levitin followed every policy, legal, and market development in detail and their complementary perspectives brought unique insight. You could have no better, more evidence-based chroniclers of this painful period. And, agree or disagree, all serious policy makers must reckon with their analysis of the many policy options and their own proposal for ensuring we never see such a housing bubble again.
-- Sarah Rosen Wartell, President, Urban Institute
Levitin and Wachter deploy their formidable expertise to analyze the biggest housing policy issues left in the wake of the 2008 housing bubble. Their insights on the bubble’s causes are fresh, compelling, and informed by newly-mined data. Their recommendations for preventing a future housing bubble reflect deep sophistication as well as wisdom and humanity. A must-read for anyone who cares about housing policy or equality.
-- Patricia A. McCoy, former Assistant Director of Mortgage Markets, Consumer Financial Protection Bureau, and Liberty Mutual Insurance Professor, Boston College Law School
Stands as an alt-sophisticated examination of one of the nation’s greatest financial cataclysms…A valuable desk reference for faculty, students, and practitioners in housing policy and planning, housing law, real estate, and banking.
-- Dennis E. Gale Journal of the American Planning Association
TABLE OF CONTENTS
Introduction: In Praise of Homeownership
1. Housing Finance before the New Deal
2. The New Deal Mortgage
3. The Rise of Securitization
4. The Boom and the Bubble
5. The Bubble Bursts
6. Timing the Bubble
7. Demand or Supply?
8. Theories of the Bubble
9. The Wall Street Securitization Bubble
10. The Key Market Failure
11. Postcrisis Reforms and Developments
12. Principles for Reform
13. Meet Franny Meg
Appendix A: The Pre–NewDeal Farm Finance System
Appendix B: The Levitin-WachterSubprime PLS Dataset
Appendix C: CDO ManagerCompensation