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Understanding the subprime mortgage crisis

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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.

Suggested Citation

  • Yuliya Demyanyk & Otto van Hemert, 2007. "Understanding the subprime mortgage crisis," Supervisory Policy Analysis Working Papers 2007-05, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlsp:2007-05
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    References listed on IDEAS

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    1. John Y. Campbell & João F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1449-1494.
    2. 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, June.
    3. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
    4. Koijen, Ralph S.J. & Hemert, Otto Van & Nieuwerburgh, Stijn Van, 2009. "Mortgage timing," Journal of Financial Economics, Elsevier, vol. 93(2), pages 292-324, August.
    5. Amy Cutts & Robert Order, 2004. "On the Economics of Subprime Lending," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 167-196, November.
    6. von Furstenberg, George M & Green, R Jeffery, 1974. "Home Mortgage Delinquencies: A Cohort Analysis," Journal of Finance, American Finance Association, vol. 29(5), pages 1545-1548, December.
    7. Isabelle Huault & V. Perret & S. Charreire-Petit, 2007. "Management," Post-Print halshs-00337676, HAL.
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    Keywords

    Subprime mortgage; Mortgage loans;

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