Conclusions

While it is fashionable to argue that the regulation of the mortgage market that existed before 1980 was inefficient (see, for example, Sellon, 1990), it is the case that the Depression of the 1930s nearly destroyed the country by the complete failure of the financial system.

But this business model was undermined by changing economic circum­stances in the 1960s and 1970s. The changes in financial regulation that began at the end of the 1970s eventually dismantled all of the New Deal reforms, not just in mortgage finance but across the banking system. While these changes in mortgage finance have mainly been called deregulation, my discussion shows that the government was always responding to the current crisis in the mortgage market. The banks who controlled those markets were the main agents of con­vincing the government to create the new rules to support their activities. Dereg­ulation was an ideologically loaded word that justified doing what the particular banks wanted to preserve their profits. From the 1980s until 2008, Congress and the executive branch always gave the banks what they wanted. For example, the crisis of the savings and loan banks in the 1970s and early 1980s involved creat­ing a whole new set of rules that allowed those banks to pay whatever interest rates they wanted for deposits, make whatever investments they chose, and be guaranteed that the deposits they managed to secure would be paid back by the government if they failed to produce a profit.

When the savings and loan model met its ultimate demise in the late 1980s, it was replaced by the GSEs, which had been created during the 1960s and early 1970s to provide a backup for the savings and loan model.

The rhetoric that surrounded these financial innovations during the 1990s assumed that the financial innovations set off by the mortgage securitization in­dustry were both efficient and productive. But in the end, the effect of all this financial innovation was to barely raise the homeownership rate from 65 percent in 1980 to 69 percent in 2007. That rate has now dropped in the wake of the fi­nancial crisis to 64 percent. While regulation of the New Deal variety has gotten a bad name, it is clear that the financial revolution that innovated new forms of financial products based on mortgage securitization has done worse.

When the GSEs stepped into the breach left by the savings and loan banks, they created the possibility for an entire new group of financial firms to emerge. The disintegration of the mortgage business resulted in the creation of a new set of firms in very fragmented markets. By 1993, a mortgage might pass through four sets of hands before it ended up with its ultimate investor. Many observers and regulators thought that this model dominated the industry on the eve of the crisis in 2008 (Ashcraft and Schuerman, 2008; Purnanandam, 2011).

From the perspective of 1993, what happened to the mortgage securitization industry next was totally unexpected. The large size of the mortgage market and the possibility to make money off of all phases of the mortgage securitization process played a major role in the reorganization of the entire American finan­cial sector. This reorganization was just beginning in 1993 and would require the next eight years to come to fruition. Instead of remaining fragmented, the industry became vertically integrated. By 2001, almost all of the largest Ameri­can commercial, investment, and savings and loan banks were involved in some or all of the phases of the mortgage markets. In the world of 1993, one could still tell the difference between savings and loan banks, commercial banks, and in­vestment banks in terms of their main markets. By 2001, for many of the largest banks, they had all become the same bank. This new model of the banks was the structure that was in place post-2001 and the one that led the boom from 2001— until the crash of 2008.