Abstract
We track the evolution of financing of residential real estate through the housing boom in the early- to mid-2000s and the resolution of distress during the bust during the late 2000s. Financial innovation, in the form of non-traditional mortgage products and the expansion of alternative lending channels, namely non-agency securitization, fundamentally altered the mortgage landscape during the boom. We describe the impact of these changes in mortgage finance on borrowers and loan performance, as well as their impact on the resolution of distressed mortgages. We summarize the existing research and argue that the form of financial intermediation had a direct impact on lending standards and on the potential for renegotiating residential loans. In addition, we provide new evidence on agency conflicts in the securitization process, and detail broader challenges to cost-effective mortgage renegotiation. We conclude by considering what lessons for the future of mortgage finance can be drawn from the recent housing boom and bust episode.