David M. Harrison, Ph.D. Real Estate Finance Texas Tech University The Development of Mortgage Markets 1950’s – A Decade of Stability  Maturity Mismatch???

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David M. Harrison, Ph.D. Real Estate Finance Texas Tech University The Development of Mortgage Markets 1950’s – A Decade of Stability  Maturity Mismatch???  Inflation:  Regulation Q: 1960’s – Creeping Inflation, Disintermediation, and the rise of the Secondary Mortgage Market

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University The Development of Mortgage Markets

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University The Development of Mortgage Markets 1970’s – FRM Problems with Inflation  The “Tilt” Effect  Supply Problems  Continued Growth of the Secondary Market

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University The “Tilt” Effect

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University The Development of Mortgage Markets 1980’s – Deregulation, the Growth of AMI’s, and the Thrift Crisis

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University The Thrift Crisis Regulatory Failure:  FSLIC Forbearance  Additions to Net Worth  RAP vs. GAAP Accounting The “Zombie” Theory

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University FIRREA to the Rescue??? Changes Mandated FIRREA  Limitations of FIRREA 

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Risk-Based Capital Guidelines AssetRisk WeightBook Value Treasuries/GNMAs0$2,000,000 FreddieMac/FannieMae MBS20$5,000,000 Residential Mortgages50$4,000,000 Commercial Mortgages100$3,000,000 Real Estate Owned (REO)200$1,000,000

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Calculating Net Worth for S&L’s Period 1: 1-year market rate=7%, 30-year market rate=9%  Assets  30-year mortgages, 9% coupon – BV=$50,000,000  Building and Land – BV=$5,000,000  Liabilities  1-year CDs at 1-year market rate – BV=$50,000,000  Equity = ? Period 2: 1-year market rate=8%, 30-year market rate=10%  Assets:  30-year mortgages, 9% coupon – BV=$50,000,000  Building and Land – BV=$5,000,000  Liabilities:  1-year CDs at 1-year market rate – BV=$50,000,000  Equity = ?

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University The Development of Mortgage Markets 1990’s – Dominance of the Secondary Market 2000’s – Continued Dominance of the Secondary Market, Development of Sub-prime markets, and the housing crunch