Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques, 2nd Edition

CHAPTER 1

Overview of Mortgages and the Consumer Mortgage Market

Over the past few decades, the residential mortgage market in the United States has emerged as one of the world's largest asset classes. At its peak in the first quarter of 2008, the total face value of household mortgage debt exceeded $10.6 trillion dollars. The growth of the residential mortgage market reflected the rapid growth in the aggregate value of real estate between 2001 and 2006, along with consumers' propensity to monetize their home equity through additional borrowing.

The composition and performance of the mortgage market has undergone profound shifts on several occasions, and can be divided into separate phases. The period between 2001 and early 2007 was characterized by numerous innovations in product features, pricing paradigms, and underwriting practices, which were underpinned by steady nationwide increases in home prices. The sudden and protracted decline in the credit performance of residential mortgage loans, which first became apparent in 2006, led to the recognition that many of the products and practices developed during the earlier period were fundamentally flawed, with their weaknesses masked by the strength in the residential real estate markets. This led to a retrenchment by mortgage lenders characterized by conservative lending practices and greater regulatory scrutiny. At this writing, most lending programs require high credit scores and (with the exception of some government-backed ...