The defining characteristic of the economic downturn of the last few years has been the collapse in real estate prices from their 2006 peak. The losses have impacted the economy in a variety of ways. Aside from devaluing many families' single largest asset, declining home prices removed the equity extraction that had been juicing consumption for years. The housing crash has also impacted the labor markets by both destroying many high-paying jobs in the construction trades and impairing the mobility of workers saddled with negative equity.

While it isn't news that home prices impact the prepayment and credit performance of mortgage loans, it is nonetheless useful to review some of the lessons of the past few years. One is that the performance of all mortgage products is linked to stable home prices. In the early throes of the "mortgage crisis," there was commentary that the gross underestimation of subprime default rates was due to the lack of long-term performance data on the product; there were, by contrast, many years of performance history on prime mortgages. In retrospect, however, there was a dearth of performance data for all mortgage products in an environment of declining home prices. Between 1972 and 2006, for example, the Freddie Mac national home price index averaged 6% year/year increases, without a single negative quarter. This implies that the historical performance of all mortgage products, including prime loans, had been distorted by the steady increases in home prices.

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