Understanding the Subprime Mortgage Crisis
Yuliya S. Demyanyk
Federal Reserve Bank of Cleveland
Otto Van Hemert
New York University (NYU) - Department of Finance
December 5, 2008
Using loan-level data, we analyze the quality of subprime mortgage loans by adjusting their performance for differences in borrower characteristics, loan characteristics, and macroeconomic conditions. We find that the quality of loans deteriorated for six consecutive years before the crisis and that securitizers were, to some extent, aware of it. We provide evidence that the rise and fall of the subprime mortgage market follows a classic lending boom-bust scenario, in which unsustainable growth leads to the collapse of the market. Problems could have been detected long before the crisis, but they were masked by high house price appreciation between 2003 and 2005.
Number of Pages in PDF File: 40
Keywords: mortgage, subprime, delinquency, foreclosure
JEL Classification: D12, G12, G21working papers series
Date posted: October 10, 2007 ; Last revised: June 20, 2009
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