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

David M. Harrison, Ph.D.Real Estate FinanceTexas 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

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1970’s – FRM Problems with Inflation The “Tilt” Effect

Supply Problems

Continued Growth of the Secondary Market



The “Tilt” Effect




1980’s – Deregulation, the Growth of AMI’s, and the Thrift Crisis



The Thrift Crisis

Regulatory Failure: FSLIC Forbearance

Additions to Net Worth

RAP vs. GAAP Accounting

The “Zombie” Theory



FIRREA to the Rescue??? Changes Mandated FIRREA

Limitations of FIRREA



Risk-Based Capital GuidelinesAsset Risk Weight Book Value

Treasuries/GNMAs 0 $2,000,000

FreddieMac/FannieMae MBS 20 $5,000,000

Residential Mortgages 50 $4,000,000

Commercial Mortgages 100 $3,000,000

Real Estate Owned (REO) 200 $1,000,000



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 = ?




1990’s – Dominance of the Secondary Market

2000’s – Continued Dominance of the Secondary Market, Development of Sub-prime markets, and the housing crunch


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

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