The Banks Did It by Neil Fligstein

Author:Neil Fligstein
Language: eng
Format: epub
ISBN: 9780674259010
Publisher: Harvard University Press
Published: 2021-03-11T00:00:00+00:00

The Basic Facts

During the 1990s, all of the stock indices, particularly the NASDAQ index, increased dramatically. The market was driven by interest in the initial public offerings of a wave of internet companies coming to market. Beginning in 2000, that market peaked and began to fall dramatically. The NASDAQ index was at about 1,000 in 1995, and it peaked at 5,048 in 2000, an increase of 500 percent. By the end of 2001, it had fallen to 1,500. The Federal Reserve Bank was worried about the effect of the stock market crash on the economy and began to dramatically lower interest rates.1 During the 1990s, the rate was around 5 percent, and it peaked in 2000 at 6 percent. Within twenty-four months, the rate dropped to 1 percent. It began to rise in 2003 but remained under 3 percent until 2005.

The most important impact of this dramatic lowering of the federal funds rate was that credit throughout the economy grew dramatically cheaper. This created an amazing opportunity for banks that were originators and securitizers (Westhoff and Kramer, 2001; Asset Securitization Report, 2001). For originators, low interest rates meant ramping up their financing and refinancing activities. Many homeowners had mortgages purchased in the 1990s that had 7–8 percent interest rates. As interest rates for mortgages dropped to 4–5 percent, originators aggressively sought out customers. The low interest rates had a huge effect on the demand for MBSs as well. Treasury bonds, the safest investments, now had very low yields (1–2 percent). For investors who needed safe investments but wanted higher returns, MBSs that paid 4–5 percent interest and were AAA rated seemed like a godsend. This perfect storm of low interest rates produced record profits for banks, particularly those who were making fees off both origination and securitization. Often these same banks held MBSs for investment.

Figure 5.1 shows that in 2000, before the rates were lowered, the mortgage origination market was about $1 trillion. But as rates dropped, the market dramatically increased. It is no surprise that in the three years (2001–2003) when interest rates were below 3 percent, mortgage originations increased almost 400 percent. Figure 5.1 also shows that the bulk of the mortgage activity was for conventional mortgages, which increased from $500 billion to $2.5 trillion, about 500 percent. There were increases in jumbo loans and subprime loans as well, from about $500 billion to $1.25 trillion, but most of the action was for conventional mortgages.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.