Chase released a report today chronicling the mortgage meltdown and outlining necessary steps for the mortgage industry.
In 2001, mortgage rates began falling as incomes were rising. Combined with higher debt-to-income ratios, interest-only loans and higher loan-to-values, borrowers were able to finance bigger loans.
Loans with 100 percent LTVs went from 1 percent of the market in 2001 to 15 percent by 2006. At the same time, loans with limited documentation went from 27 percent to 44 percent. Loans with both 100 percent LTVs and limited documentation went from 3 percent to 33 percent.
The increase in purchasing power pushed home price increases higher. From 1975 to 2000, prices were only up around 1.4 percent a year. But between 2000 to 2007 -- annual increases were around 7.6 percent.
The growth was fueled by Wall Street investors, who saw easy profits from home mortgages.
But the market took a turn last year -- pushing home prices down and foreclosures up. Investors abandoned the U.S. mortgage market, while lenders tightened guidelines. The tighter lending left fewer qualified buyers -- helping home prices to fall further.
Prices will need to fall 34 percent from the 2007 peak before growth resumes.
Chase estimates equilibrium will be restored in the first half of 2010, though pending government intervention may impact the timing.
The lender noted it is implementing stronger controls in its lending process that include tools to identify risk and fraud. It is also instituting new appraisal policies and requiring up-front fee disclosure by brokers.
Chase is calling on the industry to move towards realistic lending standards, return to a rational correlation between income and borrowing power and accept that home prices must return to a sustainable growth rate. In addition, investor and regulator confidence must be restored in the lending sector.
"The actions we take today determine the future of our industry," Chase said. "As mortgage industry professionals, this is our collective opportunity to make our mark on history and initiate the necessary corrections in order to restore integrity and sustain the mortgage lending business."