Donnerstag, 21. Oktober 2010

Interview: Prof. Susan Wachter, The Wharton School

Susan M. Wachter is Richard B. Worley Professor of Financial Management University of Pennsylvania

Was the Housing Bubble an issue of supply-side or demand-side economics?

The pricing dynamics imply that this was a supply-side phenomenon. As risk increased, with and increasingly risky book of business, and less well underwritten mortgages,  the price of risk (relative to treasuries) declined.

There have been apparently no regulatory rules for the private MBS market, where the excess are assumed. What role did the regulation play here?

Prime loans which could be securitized through Fannie and Freddie were regulated by OFHEO.  Wall Street securitized loans which did not meet these standards and there were no regulatory standards in place. Later Fannie and Freddie also purchased this paper. In fact deregulation played an important role first in precluding state insurance regulators from requiring provisions by insurers selling CDS (as long as they were rated triple A) and second allowing investment banks to increase leverage.

Before the crisis banks and other institutions sold or purchased mortgages so poorly that they are now not able to reveal the documentation in their archives. And no one seems to know whether foreclosures are handled properly. What is your take on the foreclosure issue?

The documentation problem reflects the volume at all cost mentality.  The business model was driven by fees which were upfront and multiplied with volume, whether or not the loans were underwritten with care, which of course would slow volume and raise costs.

Thank you very much.

Susan M. Wachter is Richard B. Worley Professor of Financial Management and Professor of Real Estate and Finance at the Wharton School at the University of Pennsylvania and also holds the position of Professor at the Graduate School of Design. Her current paper on the housing bubble: “Explaining the Housing Bubble”.

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