Berkeley Haas Professors Nancy Wallace and Richard Stanton were some of the few voices to forewarn of the massive risk posed by shoddy practices in the mortgage industry prior to the 2008 financial crisis.


Unfortunately, history seems to be repeating itself.


More than two years ago, Wallace and Stanton again began raising the alarm that the mortgage landscape that emerged from the last crisis is dominated by “nonbank” lenders who operate with little of their own capital or access to emergency cash. It was another disaster waiting to happen, they warned, and called for increased oversight.


No one predicted a shock the size and speed of the coronavirus pandemic, but it’s now upon us, and Wallace fears the worst. Millions of laid-off Americans won’t be able to make mortgage payments, and have been given a temporary payment reprieve by the federal rescue package. This plummeting cash flow could quickly push fragile nonbanks into bankruptcy. And since so many of the loans they service are backed by the U.S. government, that’s who will be left holding the bag.


“The $2.2. trillion (coronavirus relief act) was the largest in history, but we’re talking about liabilities that are orders of magnitude bigger,” Wallace says. “Solutions are going to have to involve trillions of dollars. It could be the bailout of all bailouts.”


Wallace says this new crisis will begin to show itself within the next 30 days, as people forgo their monthly payments and the highly leveraged nonbanks face margin calls from the brokers they’ve borrowed from—commercial banks like JP Morgan Chase and Wells Fargo Bank and investment banks such as Morgan Stanley. They need cash to pay these lenders, and they don’t have it. The nonbanks have already begun asking for a rescue.


We asked Wallace, who has studied real estate industry financial dynamics for the past three decades, to explain this looming mortgage crisis.

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Laura Counts

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