Harvard report discusses cause of nonprime mortgage lending boom

A report from the Joint Center for Housing Studies of Harvard University concluded that excess risk in the primary mortgage market was linked to demand on the secondary capital markets for mortgages with higher yields than prime mortgages, as well as the multiplication and magnification of this risk through actions taken in the capital markets.
“The combination of a glut of global liquidity, low interest rates, high leverage, and regulatory laxity in the context of initially tight and then overvalued housing markets triggered staggering risk taking,” said Eric S. Belsky, managing director of the Joint Center and one of the study’s authors. “Capital markets supplied credit through Wall Street in large volumes for risky loans to risky borrowers and then multiplied these risks by issuing derivatives that exposed investors to risks in amounts much larger than the face amount of all the loans.”
The report also found that regulatory failures allowed the market to chase higher returns through excessive leverage and risk taking. Many securities were issued a smaller face amount than the total face value of loans in the pools to hold aside reserves against losses, according to the report. A full copy of this report, entitled "Understanding the Boom and Bust in Nonprime Mortgage Lending," is available online.