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Understanding the subprime mortgage crisis

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  • Yuliya Demyanyk
  • Otto Van Hemert
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    Abstract

    We analyze the subprime mortgage crisis: an unusually large fraction of subprime mortgages originated in 2006 being delinquent or in foreclosure only months later. We utilize a loan-level database, covering about half of all US subprime mortgages, and identify two major causes. First, over the past five years, high loan-to-value borrowers increasingly became high-risk borrowers, in terms of elevated delinquency and foreclosure rates. Lenders were aware of this and adjusted mortgage rates accordingly over time. Second, the below-average house price appreciation in 2006-2007 further contributed to the crisis.

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    File URL: http://www.stlouisfed.org/banking/pdf/SPA/SPA_2007_05.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of St. Louis in its series Supervisory Policy Analysis Working Papers with number 2007-05.

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    Date of creation: 2007
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    Handle: RePEc:fip:fedlsp:2007-05

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    Related research

    Keywords: Subprime mortgage ; Mortgage loans;

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    1. Ralph S.J Koijen & Otto Van Hemert & Stijn Van Nieuwerburgh, 2007. "Mortgage Timing," NBER Working Papers 13361, National Bureau of Economic Research, Inc.
    2. Joao Cocco & John Campbell, 2004. "Household Risk Management and Optimal Mortgage Choice," Econometric Society 2004 North American Winter Meetings 646, Econometric Society.
    3. Yongheng Deng & John M. Quigley & Robert Van Order, . "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
    4. Anthony Pennington-Cross & Souphala Chomsisengphet, 2007. "Subprime Refinancing: Equity Extraction and Mortgage Termination," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(2), pages 233-263, 06.
    5. von Furstenberg, George M & Green, R Jeffery, 1974. "Home Mortgage Delinquencies: A Cohort Analysis," Journal of Finance, American Finance Association, vol. 29(5), pages 1545-48, December.
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