What caused the housing crisis, and what can we learn from it to prevent another? In her paper titled “Failure to learn from failure: The 2008 mortgage crisis as a déjà vu of the mortgage meltdown of 1994” Natalya Vinokurova, Assistant Professor of Management at the Wharton School, cites several key factors as instrumental in the Great Recession of 2008, including the introduction of mortgage-backed securities and the development of tranching.
First, Vinokurova notes that when they were introduced, mortgage-backed securities (MBS) were not believed to be bonds. MBS were originally introduced to, according to Vinokurova’s research, find funding for the baby boomers as they began to buy houses in the 1970’s.
According to Vinokurova, MBS and bonds are different “on a number of levels.” Investors would have the risk of a mortgage-backed security being payed off earlier than expected.