There is little consensus as to the cause of the housing bubble that precipitated the financial crisis of 2008. Numerous explanations exist: misguided monetary policy; government policies encouraging affordable homeownership; irrational consumer expectations of rising housing prices; inelastic housing supply. None of these explanations, however, is capable of fully explaining the housing bubble, much less the parallel commercial real estate bubble.
This Article posits a new explanation
for the housing bubble. It
demonstrates that the bubble was a supply-side phenomenon, attributable to an
excess of mispriced mortgage finance:
mortgage finance spreads declined and volume increased, even as risk
increased, a confluence attributable only to an oversupply of mortgage finance.
The mortgage finance supply glut
occurred because markets failed to price risk correctly due to the complexity
and heterogeneity of the private-label mortgage-backed securities (MBS) that
began to dominate the market in 2004. The rise of private-label MBS exacerbated informational asymmetries
between the financial institutions that intermediate mortgage finance and MBS
investors. The result was overinvestment
in MBS that boosted the financial intermediaries’ profits and enabled borrowers
to bid up housing prices.
Despite mortgage securitization’s inherent
informational asymmetries, it is critical for the continued availability of the
long-term fixed-rate mortgage, which has been the bedrock of American
homeownership since the Depression. The benefits of securitization, therefore, must be reconciled with the need for economic stability. The
Article proposes the standardization of MBS to reduce complexity and
heterogeneity in order to rebuild a sustainable, stable housing finance market
based around the long-term fixed-rate mortgage.Direct-to-author (not posted) comments are most welcome.