The Nonprime Mortgage Crisis and Positive Feedback Lending

57 Pages Posted: 1 Nov 2015 Last revised: 7 Mar 2018

Date Written: March 5, 2018


The “great recession” of 2007–2009 was sparked by a bubble in U.S. housing prices, driven in turn by a bubble in nonprime mortgage lending. We collect evidence that the risk of a nonprime housing bubble (not the certainty, but a meaningful risk) should have been obvious to the main participants in the markets for nonprime lending and related mortgage-backed securities (nonprime MBS), including originators, securitizers, rating agencies, money managers, and institutional investors. Those who did not see the risk were, in many cases, willfully blind. We also discuss the strong positive feedback nature of typical nonprime mortgages. This positive feedback made it highly likely that, if nonprime housing prices flattened, let alone fell, they would soon crash and take many nonprime MBS with them. We discuss regulatory responses that might limit positive feedback lending, cause the next bubble to be smaller and less likely, and make the post-bubble aftermath less painful.

Keywords: MBS, ABS, CDO, subprime, nonprime, financial crisis, feedback

Suggested Citation

Black, Bernard S. and Whitehead, Charles K. and Coupland, Jennifer, The Nonprime Mortgage Crisis and Positive Feedback Lending (March 5, 2018). Northwestern Law & Econ Research Paper 15-23, ECGI - Law Working Paper, Cornell Legal Studies Research Paper 15-40, Available at SSRN: or

Bernard S. Black (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Charles K. Whitehead

Cornell Law School ( email )

Myron Taylor Hall
Ithaca, NY 14853
United States

Jennifer Coupland

Northwestern University - Pritzker School of Law ( email )

600 North Lake Shore Drive
Chicago, IL 60601
United States

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