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Moving Forward

Moving Forward: The Future of Consumer Credit and Mortgage Finance

Nicolas P. Retsinas
Eric S. Belsky
Stable URL: http://www.jstor.org/stable/10.7864/j.ctt12631b
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  • Book Info
    Moving Forward
    Book Description:

    The recent collapse of the mortgage market revealed fractures in the credit market that have deep roots in the system's structure, conduct, and regulation. The time has come for a clear-eyed assessment of what happened and how the system should be strengthened and restructured. Such reform will have a profound and lasting impact on the capacity of Americans to use credit to build assets and finance consumption.

    Moving Forwardexplores what caused the crisis and, more important, focuses on the path ahead. The challenge remains the same as ever: protect consumers, ensure fairness, and guarantee soundness of the financial system without stifling innovation and overly restricting access to credit and consumer choice. Nicolas Retsinas, Eric Belsky, and their colleagues aim to stimulate debate based on analysis of the opportunities and challenges presented by the various components of global capital markets: financial engineering, risk assessment and management, specialization of financial intermediation, and marketing methods. The contributors -leaders in business, government, academia, and the nonprofit sector -discuss new research and ideas about the future of credit markets, including how improvements might be shaped by industry leaders.

    Contributors: John Y. Campbell, Harvard University; Marsha J. Courchane, Charles River Associates; Ren Essene, Federal Reserve Board; Allen Fishbein, Federal Reserve Board; Howell E. Jackson, Harvard Law School; Melissa Koide, Center for Financial Services Innovation; Michael Lea, San Diego State University; Eugene Ludwig, Promontory Financial Group; Brigitte C. Madrian, Harvard Kennedy School; Nela Richardson, Joint Center for Housing Studies of Harvard University; Rachel Schneider, Center for Financial Services Innovation; Peter Tufano, Harvard Business School; Peter M. Zorn, Freddie Mac

    eISBN: 978-0-8157-0504-8
    Subjects: Business, Finance
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Table of Contents

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  1. Front Matter (pp. i-iv)
  2. Table of Contents (pp. v-vi)
  3. Acknowledgments (pp. vii-viii)
  4. Introduction: Credit Everywhere, but Not a Drop to Drink (pp. 1-5)
    NICOLAS P. RETSINAS and ERIC S. BELSKY

    Credit, credit everywhere, nary a drop to drink.” If Coleridge’s ancient mariner could time-travel to the United States today, he would empathize. Low-income Americans live in a society lavish with houses, cars, and stuff lining the shelves in retail malls. The problem is money. Most low-wage workers do not have enough to buy what they need, much less what their heart desires.

    And credit is scarce, at least for them. Worse, that scarce credit is becoming tighter.

    This world of tight credit is not new, but many have forgotten that it ever existed. Until three years ago, we all were...

  5. Comment: Seven Steps to a Rational Credit Policy (pp. 6-8)
    EUGENE LUDWIG

    While shock waves from the biggest financial crisis since the Great Depression continue to roll through our nation, some experts wonder how we will reconcile extending credit to low-and moderate-wage borrowers, including credit-impaired borrowers, while protecting the economy and consumers. This question is occasioned, of course, by the current mortgage and consumer catastrophe we are living through and by the hue and cry raised by those who claim that the entire financial storm of the past three years was caused by the Community Reinvestment Act and, in their view, benighted programs to make credit available to the low-to moderate-income borrower....

  6. 1 Rebuilding the Housing Finance System after the Boom and Bust in Nonprime Mortgage Lending (pp. 9-60)
    ERIC S. BELSKY and NELA RICHARDSON

    The cycle of boom and bust in nonprime¹ and nontraditional² mortgage lending in the United States is without precedent. The factors that fueled the boom and the way it unfolded sowed the seeds for the bust that, in hindsight, appears to have been inevitable. The amount of risk in the system ballooned as a result of changes in lending practices. At the same time that credit was opened up to borrowers who previously had been denied loans because of past problems repaying their debts, many other underwriting standards were loosened. In addition, products with heavy payment reset risks proliferated in...

  7. 2 How Should We Serve the Short-Term Credit Needs of Low-Income Consumers? (pp. 61-85)
    RACHEL SCHNEIDER and MELISSA KOIDE

    Almost one-third of the 30 million U.S. households who are unbanked or underbanked borrow to pay for small-dollar, short-term needs. They obtain loans through payday lenders, rent-to-own centers, pawnshops, refund anticipation lenders, or any of a variety of other nonmortgage—related sources, including friends and family.¹ These individuals either conduct their financial lives entirely outside of traditional banks and credit unions (unbanked) or maintain a checking or savings account while also using alternative providers (underbanked). Lowerincome and certain minority groups are disproportionately represented among unbanked and underbanked households.²

    Almost 40 percent of those borrowing do so to pay bills or...

  8. 3 A Changing Credit Environment and Its Impact on Low-Income and Minority Borrowers and Communities (pp. 86-117)
    MARSHA J. COURCHANE and PETER M. ZORN

    The recent tumult experienced in residential mortgage markets in the United States has left many struggling to determine what caused the crisis, what can be done to prevent a future crisis, and what can be done to mitigate the consequences of the current crisis. These are big and important questions, and accurately resolving them requires a clear and precise understanding of what transpired over the past several years.

    This chapter provides an empirical analysis of a key five-year period—2004 through 2008—that was characterized by changing credit standards and, potentially, varying use of risk-based pricing. We broadly explore these...

  9. 4 Alternative Forms of Mortgage Finance: What Can We Learn from Other Countries? (pp. 118-149)
    MICHAEL LEA

    The U.S. mortgage finance system has gone from the envy of the world to a case study of failure in two short years. As recently as the 2003–05 period, the system generated an enormous volume of originations (nearly $4 trillion) that contributed to a record level of homeownership (69.3 percent).¹ Impressive gains were made in low-income and minority rates of homeownership. The system was characterized by low mortgage interest rates, robust competition, particularly from nonbank lenders, buoyant house prices, and low default rates. While the government role was significant, the major government-supported institutions were losing market share. There were,...

  10. 5 The Home Mortgage Disclosure Act at Thirty-Five: Past History, Current Issues (pp. 150-188)
    ALLEN FISHBEIN and REN ESSENE

    This year marks the thirty-fifth anniversary of the Home Mortgage Disclosure Act (HMDA),¹ a law designed to discourage redlining in mortgage lending and to encourage reinvestment in the nation’s cities by providing greater transparency and thus greater public scrutiny of lending activities. Enacted by Congress in 1975, HMDA requires most mortgage lenders to collect information about their home lending activities. Through public disclosure of mortgage data, HMDA implicitly sanctions a strong role for citizen monitors whose “regulation from below” is intended to augment enforcement efforts by the traditional regulatory agencies. A subject of controversy for much of its history, HMDA...

  11. 6 Loan-Level Disclosure in Securitization Transactions: A Problem with Three Dimensions (pp. 189-205)
    HOWELL E. JACKSON

    The securitization of residential mortgages and other forms of consumer credit has become a subject of intense national interest and debate. Many have questioned the wisdom of the originate-to-distribute model of loan underwriting, and others have focused on the conflicts inherent in the role of investment banks assembling securitization pools and then marketing them to their institutional clients. The capacity of credit-rating firms to rate accurately the securities backed by securitization pools has been roundly criticized in many quarters. Still others have identified as problematic the manner in which borrowers were encouraged to obtain mortgages that they were unlikely to...

  12. 7 The Regulation of Consumer Financial Products: An Introductory Essay with a Case Study on Payday Lending (pp. 206-244)
    JOHN Y. CAMPBELL, HOWELL E. JACKSON, BRIGITTE C. MADRIAN and PETER TUFANO

    Recent economic events have focused attention on the financial decisions made by consumers and the practices of retail financial institutions. Many argue that consumer confusion in the increasingly complex mortgage market contributed to the subprime market meltdown of 2007, which in turn triggered the global financial crisis. More generally, there is widespread concern that consumers are being asked to take increasing responsibility for their own financial well-being in retirement and that many households are ill prepared for this task.

    While consumer financial regulation has always been an important element of public policy, it has received much greater emphasis recently. One...

  13. Contributors (pp. 245-246)
  14. Index (pp. 247-264)
  15. Back Matter (pp. 265-265)