Page 490 - untitled

Peter J. Wallison 461

25
Association (MBA). Th is data allows a comparison between the foreclosure starts
that have thus far come out of the 1997-2007 bubble and the foreclosure starts in the
two most recent housing bubbles (1977-1979 and 1985-1989) shown in Figure 1.
Aft er the housing bubble that ended in 1979, when almost all mortgages were prime
loans of the traditional type, foreclosure starts in the ensuing downturn reached a
high point of only .87 percent in 1983. Aft er the next bubble, which ended in 1989
and in which a high proportion of the loans were the traditional type, foreclosure
starts reached a high of 1.32 percent in 1994. However, aft er the collapse of the
1997-2007 bubble—in which half of all mortgages were NTMs—foreclosure starts
reached the unprecedented level (thus far) of 5.3 percent in 2009. And this was true
despite numerous government and bank eff orts to prevent or delay foreclosures.
All the foregoing data is signifi cant for a proper analysis of the role of
government policy and NTMs in the fi nancial crisis. What it suggests is that
whatever eff ect low interest rates or money fl ows from abroad might have had in
creating the great U.S. housing bubble, the defl ation of that bubble need not have
been destructive. It wasn’t just the size of the bubble; it was also the content. Th e
enormous delinquency rates in the U.S. (see Table 3 below) were not replicated
elsewhere, primarily because other developed countries did not have the numbers
of NTMs that were present in the U.S. fi nancial system when the bubble defl ated.
As shown in later sections of this dissent, these mortgage defaults were translated
into huge housing price declines and from there—through the PMBS they were
holding—into actual or apparent fi nancial weakness in the banks and other fi rms
that held these securities.
Accordingly, if the 1997-2007 housing bubble had not been seeded with an
unprecedented number of NTMs, it is likely that the fi nancial crisis would never
have occurred.

3. Delinquency Rates
on Nontraditional Mortgages
NTMs are non-traditional because, for many years before the government
adopted aff ordable housing policies, mortgages of this kind constituted only a
26
small portion of all housing loans in the United States. Th e traditional residential
mortgage—known as a conventional mortgage—generally had a fi xed rate, oft en
for 15 or 30 years, a downpayment of 10 to 20 percent, and was made to a borrower
who had a job, a steady income and a good credit record. Before the GSE Act, even
subprime loans, although made to borrowers with impaired credit, oft en involved
substantial downpayments or existing equity in homes. 27
Table 3 shows the delinquency rates of the NTMs that were outstanding on
June 30, 2008. Th e grayed area contains virtually all the NTMs. Th e contrast in
quality, based on delinquency rates, between these loans and Fannie and Freddie
prime loans in lines 9 and 10 is clear.
25 Mortgage Bankers Association National Delinquency Survey.
26 See Pinto, “Government Housing Policies in the Lead-Up to the Financial Crisis: A Forensic Study,”
November 4, 2010, p.58, http://www.aei.org/docLib/Government-Housing-Policies-Financial-Crisis-
Pinto-102110.pdf.
27 Id., p.42.