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The American Mortgage System

Crisis and Reform

Edited by Susan M. Wachter and Marvin M. Smith

Publication Year: 2011

Successful home ownership requires the availability of appropriate mortgage products. In the years leading up to the collapse of the housing market, home buyers frequently accepted mortgages that were not only wrong for them but catastrophic for the economy as a whole. When the housing market bubble burst, so did a cornerstone of the American dream for many families. Restoring the promise of this dream requires an unflinching inspection of lending institutions and the right tools to repair the structures that support solid home purchases. The American Mortgage System: Crisis and Reform focuses on the causes of the housing market collapse and proposes solutions to prevent another rash of foreclosures.

Edited by two leaders in the field of real estate and finance, Susan M. Wachter and Marvin M. Smith, The American Mortgage System examines key elements of the mortgage meltdown. The volume's contributors address the influence of the Community Reinvestment Act, which is often blamed for the crisis. They uncover how the government-sponsored enterprises Fannie Mae and Freddie Mac invested outside the housing market with disastrous results. They present surprising information about low-income borrowers and the strengths of local banks. This collection of thoughtful studies includes extensive analysis of loan practices and the creation of unstable mortgage securities, presenting data largely unavailable until now. More than a critique, The American Mortgage System offers solutions to the problems facing the future of American home ownership, including identifying asset price bubbles, calculating risk, and preventing discrimination in lending.

Measured yet timely and by turns provocative, The American Mortgage System provides a careful assessment of a troubled but indispensable part of the economic and social structure of the United States. This book is a sound investment for economists, urban planners, and all who shape public policy.

Published by: University of Pennsylvania Press

Series: The City in the Twenty-First Century


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pp. v-vi

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pp. 1-4

Erica and James are the best of friends. They went to the same schools, grew up in the same neighborhood, and got jobs at the same company. Their spouses work together, their children play together, and their families celebrate Fourth of July together. On paper, a mortgage...


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pp. 5-133

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1. The Secondary Market for Housing Finance in the United States: A Brief Overview

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pp. 7-25

Understanding both the current problems in the secondary market and the proposed solutions requires an understanding of the role of the secondary market in U.S. housing finance.1 In this chapter, we focus in particular on the government-sponsored enterprises (GSEs), Fannie Mae...

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2. Reasonable People Did Disagree: Optimism and Pessimism About the U.S. Housing Market Before the Crash

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pp. 26-59

The home-price bubble feels like the stock-market mania in the fall of 1999, just before the stock bubble burst in early 2000, with all the hype, herd investing and absolute confidence in the inevitability of continuing price appreciation. Optimism about future house price growth shoulders...

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3. Exploring the Determinants of High-Cost Mortgages to Homeowners in Low- and Moderate-Income Neighborhoods

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pp. 60-86

In spite of the recent impetus to reform home mortgage markets, particularly as they affect low- and moderate-income (LMI) households, little systematic evidence is available about how potential abuses in mortgage lending manifest in the mortgages held by those households. While racial...

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4. Implications of the Housing Market Bubble for Sustainable Homeownership

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pp. 87-111

The recent housing market bubble and subsequent meltdown dealt a triple blow to sustainable homeownership in the United States. First, the rapid rise in housing prices that characterized the period from 2004 to 2006 reduced housing affordability as traditionally measured. Second, an expansion of high-risk mortgage lending helped to fuel....

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5. A Framework for Consumer Protection in Home Mortgage Lending

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pp. 112-133

In this chapter, we catalog and describe the various dimensions to regulating home mortgages. We do not discuss specific lending practices, loan terms, or legal prohibitions; rather, we discuss the major issues that policy-makers should consider when framing a system to protect consumers...


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pp. 135-239

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6. A Profile of the Mortgage Crisis in a Low- and Moderate-Income Community

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pp. 137-158

It is an accepted fact in the current policy debate that the U.S. housing crisis has damaged communities. A search for newspaper articles with the words “foreclosure” and “community” coupled with such words as “ravaged,” “destroyed,” and “damaged” turns up thousands of entries. In this chapter...

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7. Constructive Credit: Revisiting the Performance of Community Reinvestment Act Lending During the Subprime Crisis

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pp. 159-186

In 1977, when advocates and legislators were first debating the merits of Senate Bill 406, the Community Reinvestment Act (CRA) of 1977, the key question confronting Congress was whether or not “redlining”—the practice of denying access to credit based on where one lived—was contributing...

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8. Navigating the Housing Downturn and Financial Crisis: Home Appreciation and Equity Accumulation Among Community Reinvestment Homeowners

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pp. 187-208

Homeownership has historically been considered an effective wealth-creation mechanism for low-income households. These households typically hold a very large proportion of their wealth in their homes. In addition, they also historically have greatly benefited...

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9. The Community Reinvestment Act: Evaluating Past Performance and Reviewing Options for Reform

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pp. 209-239

The passage of the Community Reinvestment Act (CRA) in 1977 set in motion a bold experiment that has yet to achieve its full potential. In the language of the legislation, the CRA sought to “encourage” banks to lend (“reinvest”) in their “entire community, including...


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pp. 241-367

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10. Information Failure and the U.S. Mortgage Crisis

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pp. 243-270

The global financial crisis of 2008 developed out of the failure of mortgage finance markets to adequately price risk. This chapter focuses on the role of securitization in housing finance. It does so both because of the role of secu-ritization in the recent debacle...

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11. The Expanding Financial Safety Net: The Dodd-Frank Act as an Exercise in Denial and Cover-Up

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pp. 271-285

In 1766, Voltaire famously opined that “Men use thought only to justify their wrongdoings, and speech only to conceal their thoughts.” The behavior of many government officials confirms this dictum. Officials routinely misinform the public about the reasons for—or the probable effectiveness...

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12. A Private Lender Cooperative Model for Residential Mortgage Finance

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pp. 286-304

For the past several decades, Freddie Mac and Fannie Mae have played a central role in U.S. residential mortgage finance. The design of what replaces Freddie Mac and Fannie Mae, the housing government-sponsored enterprises (GSEs),1 which are currently in conservatorship, is of enormous consequence to the performance...

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13. Improving U.S. Housing Finance Through Reform of Fannie Mae and Freddie Mac: A Framework for Evaluating Alternatives

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pp. 305-338

As was noted in Chapter 1, the government-sponsored enterprises (GSEs) known as Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation)1 were, until recently, the largest players in a U.S. housing finance system that provided mortgage financing...

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14. Some Thoughts on What to Do with Fannie Mae and Freddie Mac

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pp. 339-357

We have some time to decide on what to with the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). They, along with the Government National Mortgage Association (Ginnie Mae), are almost all of the market...

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15. The Road Not Taken: Our Failure in Redoing the Financial Architecture

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pp. 358-367

The legislation on financial reform signed by President Barack Obama this year runs over 2,000 pages in length. Its enactment into law changes the scope of permissible activities for financial firms, shifts other activities onto organized exchanges settled in clearinghouses, and...

List of Contributors

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pp. 369-376


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pp. 377-389

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pp. 391-399

Rethink. Recover. Rebuild: Reinventing Older Communities, held on May 12–14, 2010, was the fourth biennial conference of the Federal Reserve Bank of Philadelphia’s Community Development Studies and Education Department. The conference occurred on the heels of a steep downturn in housing values...

E-ISBN-13: 9780812204308
Print-ISBN-13: 9780812243512

Page Count: 392
Publication Year: 2011

Series Title: The City in the Twenty-First Century

Research Areas


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Subject Headings

  • Financial crises -- United States..
  • Secondary mortgage market -- United States.
  • Mortgage loans -- United States.
  • Subprime mortgage loans -- United States.
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