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Prudent Lending Restored

Securitization After the Mortgage Meltdown

edited by Yasuyuki Fuchita, Richard J. Herring, and Robert E. Litan

Publication Year: 2009

There is little dispute that the mortgage meltdown of 2007, created by irresponsible lending and lax oversight, helped lead to the global financial crisis. Why were these securities backed by subprime debt so desirable to so many seemingly sophisticated investors? The answer lies in distorted incentives, opaque securitization structures and a willingness to believe that house prices would continue to rise indefinitely and the hope for super-normal returns. In Prudent Lending Restored experts from the United States, Europe, and Japan draw a timeline of key events along the road to our most recent recession. Providing an in-depth analysis of the causes of the subprime mortgage meltdown, they propose reforms, including a more simplified securitization process with emphasis on oversight to encourage more prudent lending. This timely volume —the collaboration between the Brookings Institution and the Nomura Institute of Capital Markets Research —argues that securitization can and should have a brighter future, and they lay out ways that will make that possible.

Contributors: Jennifer E. Bethel (Babson College), Robert E. Eisenbeis (Federal Reserve Bank of Atlanta), Allen Ferrell (Havard Law School), Günter Franke (Konstanz University, Germany), Jack Guttentag (University of Pennsylvania), Gang Hu (Babson College), Tetsuya Kamiyama (Nomura Institute of Capital Markets Research, Tokyo), Kei Kodachi (NICMR), Jan P. Krahnen (Goethe University Frankfurt, Germany), Joseph R. Mason (Louisiana State University), Igor Roitburg (Default Mitigation Management LLC), and Eiichi Sekine (NICMR).

Published by: Brookings Institution Press


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pp. Cover-ii

TItle page, Copyright

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pp. iii-iv


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pp. v-vi

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pp. vii-viii

In 2004 the Brookings Institution was approached by the Tokyo Club Foundation for Global Studies to showcase research on selected topics in financial market structure and regulation of interest to policymakers, scholars, and citizens in the United States and Japan and elsewhere. This collaboration, led by ...

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The Future of Securitization: An Introduction

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pp. 1-10

Since its development over a period of more than three decades, the securitization of loans-the process by which many individual loans (initially mortgages and since then many other types of loans as well) are packaged together in trusts and used as collateral for securities-has been hailed as one of the more important and socially useful financial innovations of recent ...

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Financial Turmoil and Central Bank Responses in the United States, United Kingdom, European Union, and Japan

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pp. 11-78

The protracted financial market turmoil now affecting most industrial countries, which had its genesis in the U.S. subprime mortgage market, initially elicited significantly different responses from various central banks (principally, the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan). It also exposed significantly different structural defects in the ...

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Structuring for Leverage:CPDOs, SIVs, and ARSs

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pp. 79-104

Creating less-risky portfolios through diversification is a fairly straightforward proposition. But while textbooks suggest that leverage can be used to increase risk, too, applying leverage is all too cursorily dismissed as being hindered by the practical inability to borrow at the risk-free rate. It is hard to disagree that despite the equity premium puzzle, we rarely see returns dear enough to ...

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The Future of Securitization

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pp. 105-162

By now, the so-called credit crisis is more than a year old. Over its course, the crisis has caused enormous casualties, forcing large international banks to write off hundreds of billions of dollars. While most of those losses were borne by private investors, namely bank shareholders, the state has had to absorb considerable casualties ...

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Legal and Economic Issues in Litigation Arising from the 2007-08 Credit Crisis

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pp. 163-236

The credit crisis is the foremost economic issue facing the United States today. With housing prices high and interest rates low through 2006, millions of households with weak credit histories purchased new homes or refinanced existing ones, using subprime residential mortgage loans, many with adjustable interest rates. Investment banks securitized ...

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Mortgage Payment Insurance and the Future of the Housing Finance System

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pp. 237-250

In this chapter we argue that a systemic weakness in the way that the mortgage finance system deals with default risk has contributed greatly to the current mortgage crisis. That weakness is the prevailing system of risk-based interest rate pricing—the practice of charging higher interest rates on mortgage loans that are perceived to be riskier than

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The Development and Future of Securitization in Asia

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pp. 251-304

The global fallout from the subprime mortgage crisis in the United States has fueled debate about the advantages and disadvantages of securitization. Our view, however, is that it would be more constructive to identify and remedy any shortcomings in the securitization process in order to make the most of its inherent advantages than to question its very existence. The debate about securitization ...


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pp. 305-306

Index, Back Cover

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pp. 307-337

E-ISBN-13: 9780815703990
E-ISBN-10: 0815703996

Page Count: 326
Publication Year: 2009