Risk and Quality in Residential Mortgage Markets
Prof. Dr. Johan Walden, SFI Senior Chair, University of Lausanne
The U.S. single-family residential-mortgage market is large, with a loan origination volume per year of almost $3 trillion between 2004 and 2006. The market has become increasingly complex, with a long-term trend toward disaggregation and specialization. The 2007-2010 subprime mortgage crisis showed how the incentive problems present in such complex, opaque markets with multiple stakeholders create. Understanding the heterogeneity in quality and the risk associated with these residential mortgages is important in avoiding future crises.
Current Situation
New regulation and more stringent lending standards have mitigated many of the previous risks leading up to the crises. However, the introduction of new lending channels – nonbank mortgage companies – have introduced new vulnerabilities that some believe create significant risk exposure for important segments of the market, e.g., loans insured by the Federal Housing Administration (FHA) and Veterans Affairs (VA). The current market may therefore be riskier than it seems. We also extend the focus from the US to European mortgage markets, in particular to the Swiss market, where mortgage lending has been fueled by the negative interest rate environment.
Objective
The master class will cover the period leading up to the crisis, and the different explanations proposed in the academic literature. Standard explanations include easy access to capital because of the credit expansion, high house price appreciation combined with speculation, expansion of lending to marginal borrowers because of mortgage securitization, and network effects in the securitized residential mortgage market. In particular, we will share some insights on the rescue of UBS during the financial crisis.
We will also discuss current residential mortgage markets, whether more stringent regulation and lending standards have mitigated the risk for another global mortgage crash, and what are the most important risk factors that could lead to such a crash, as of today.
Target Audience
The class is aimed at professionals in the financial industry, who wish to broaden their knowledge of this important asset class and sector in the economy. Specific expertise in real estate markets is not required. The format will be a combination of lectures, discussions, and group problem solving.
SAQ Recertification
This Master Class is an acknowledged SAQ recertification measure for the CWMA and CCoB profile and comprises four learning hours.