Prudent Lending Restored

There is little dispute that the mortgage meltdown of 2007, created by irresponsible lending and lax oversight, helped lead to the global financial crisis. Why were these securities backed by subprime debt so desirable to so many seemingly sophisticated investors? The answer lies in distorted incentives, opaque securitization structures and a willingness to believe that house prices would continue to rise indefinitely and the hope for super-normal returns. In Prudent Lending Restored experts from the United States, Europe, and Japan draw a timeline of key events along the road to our most recent recession. Providing an in-depth analysis of the causes of the subprime mortgage meltdown, they propose reforms, including a more simplified securitization process with emphasis on oversight to encourage more prudent lending. This timely volume—the collaboration between the Brookings Institution and the Nomura Institute of Capital Markets Research—argues that securitization can and should have a brighter future, and they lay out ways that will make that possible. Contributors: Jennifer E. Bethel (Babson College), Robert E. Eisenbeis (Federal Reserve Bank of Atlanta), Allen Ferrell (Havard Law School), Günter Franke (Konstanz University, Germany), Jack Guttentag (University of Pennsylvania), Gang Hu (Babson College), Tetsuya Kamiyama (Nomura Institute of Capital Markets Research, Tokyo), Kei Kodachi (NICMR), Jan P. Krahnen (Goethe University Frankfurt, Germany), Joseph R. Mason (Louisiana State University), Igor Roitburg (Default Mitigation Management LLC), and Eiichi Sekine (NICMR).

A Brookings Institution Press and Nomura Institute of Capital Markets Research publication As the global economy continues to weather the effects of the recession brought on by the financial crisis of 2007–08, perhaps no sector has been more affected and more under pressure to change than the industry that was the focus of that crisis: financial services. But as policymakers, financial experts, lobbyists, and others seek to rebuild this industry, certain questions loom large. For example, should the pay of financial institution executives be regulated to control risk taking? That possibility certainly has been raised in official circles, with spirited reactions from all corners. How will stepped-up regulation affect key parts of the financial services industry? And what lies ahead for some of the key actors in both the United States and Japan? In After the Crash, noted economists Yasuyuki Fuchita, Richard Herring, and Robert Litan bring together a distinguished group of experts from academia and the private sector to take a hard look at how the financial industry and some of its practices are likely to change in the years ahead. Whether or not you agree with their conclusions, the authors of this volume—the most recent collaboration between Brookings, the Wharton School, and the Nomura Institute of Capital Markets Research—provide well-grounded insights that will be helpful to financial practitioners, analysts, and policymakers.

Essential reading for professional investors, risk managers, regulators, central bankers, and real estate professionals, Risk in the Global Real Estate Market: International Risk Regulation, Mechanism Design, Foreclosures, Title Systems, and REITs takes an international look at the ways in which U.S.-style constitutional laws, financial laws, and real estate laws in various countries affect global economics and risk; and analyzes specific constraints that deter market development such as Asset Liability Matching, inappropriate financial products, land title systems, inefficient constitutions and human biases. The sub-prime mortgage crisis (that began around 2006) and the Global Financial Crisis of 2007–2010 disrupted the economies of various countries and exposed many of the psychological, social, and economic problems inherent in the legal/risk infrastructure for mortgages, land title systems, REITs, securitization, and pensions. In this remarkable new book, Michael Nwogugu explains how these processes and statutes are unconstitutional and inefficient, and how they influence demand for housing, real estate prices, retirement savings, household wealth, consumer disposable income, marriage opportunities, job markets, crime, and regional economic growth. The resulting major economic and public health problems have continued to reduce the quality-of-life of nations, and continue to cause permanent declines in wealth, increases in crime and delinquency, high divorce rates, depression, and inadequate job creation, among other problems. The book examines a range of fields—including mechanism design, psychology, risk finance, and corporate governance; and emphasizes Constitutional economics as a distinct dimension of risk analysis. Risk in the Global Real Estate Market makes a compelling case about how constitutional torts increase information asymmetry, transaction costs, agency problems, and compliance costs, as well as inefficiency in real estate transactions. These problems, the book argues, are not unique to the United States, but also affect Commonwealth countries and other nations that have developed regulations that are similar to, or are based on U.S. commercial, securities, and or constitutional laws. Risk in the Global Real Estate Market presents a novel analysis of the sub-prime crisis (that first began in 2006), the failure of securitization (CMBS/MBS) markets, the Global Financial Crisis, and socio-economic problems caused by traditional mortgages and securitization. The book reveals that many of the statutes and processes that define mortgages, foreclosures, securitization, and REITs in the United States (and many common-law countries and nations that have adopted American-style real estate regulations) are fundamentally unconstitutional and inefficient, and have lasting negative effects on consumer psychology, the demand for real estate, price discovery in property markets, economic growth, and quality of life. The book examines the nature of constitutional torts and property rights as the foundation for business transactions and economic growth within the context of risk regulation, interstate commerce, takings, and legislation. Risk in the Global Real Estate Market introduces new theories of consumer psychology and institutional dynamics in real estate transactions; presents new theories of takings, and also surveys psychology/psychiatry studies (based on data from various countries) that confirm the harmful effects of mortgages, securitization, and foreclosures. Using elements of mechanism design, Michael Nwogugu develops new efficient financial products (Mortgage-Alternatives products), and presents a policy framework for a unified “Mortgage-Alternatives” market for the CEE/CIS region and China. He also explains why Asset Liability Matching hinders lending, capital formation and risk management, especially in developing countries.

Since the summer of 2007, credit markets in almost all industrial countries have been in substantial turmoil and this has become the focus of intense policy debates. The papers in this volume are contributed by the world's leading financial experts and constitute a thorough examination of the first credit market turmoil of the 21st Century. They provide an overview of the main causes, transmission mechanisms and economic implications of what by now has become a major systemic financial crisis. They assess the most important policy considerations and conclude about how to stabilize financial systems, attenuate repercussions on the real economy and shape future regulatory structures. The analyses, conclusions, and recommendations can be expected to influence both public and private policies to mitigate, if not prevent, such crises in the future.

This book proposes new fiscal rules to address the debt crisis, including a balanced budget amendment and a deficit-debt brake. It estimates the impact of the proposed rules on the economy over the next two decades.

This book provides the most comprehensive treatment of the theoretical concepts and modelling techniques of quantitative risk management. Whether you are a financial risk analyst, actuary, regulator or student of quantitative finance, Quantitative Risk Management gives you the practical tools you need to solve real-world problems. Describing the latest advances in the field, Quantitative Risk Management covers the methods for market, credit and operational risk modelling. It places standard industry approaches on a more formal footing and explores key concepts such as loss distributions, risk measures and risk aggregation and allocation principles. The book's methodology draws on diverse quantitative disciplines, from mathematical finance and statistics to econometrics and actuarial mathematics. A primary theme throughout is the need to satisfactorily address extreme outcomes and the dependence of key risk drivers. Proven in the classroom, the book also covers advanced topics like credit derivatives. Fully revised and expanded to reflect developments in the field since the financial crisis Features shorter chapters to facilitate teaching and learning Provides enhanced coverage of Solvency II and insurance risk management and extended treatment of credit risk, including counterparty credit risk and CDO pricing Includes a new chapter on market risk and new material on risk measures and risk aggregation