IDEAS home Printed from https://ideas.repec.org/a/spr/joevec/v26y2016i5d10.1007_s00191-016-0471-7.html
   My bibliography  Save this article

Mortgage originations during 2002-2007 as an example of an evolutionary market

Author

Listed:
  • James P. Dow

    (California State University, Northridge)

Abstract

The mortgage market in the United States in the early and mid-2000’s underwent a substantial shift in both the quality of loans and the nature of the products offered which eventually led to the financial collapse of 2007. However, this change did not happen all at once, instead there was a gradual shift over time as experimenting firms learned that they could sell lower quality loans into the market and other firms were forced to follow along or lose market share. Mortgages started from a position of a stable market with high-quality loans and then shifted over time to a market characterized by continually declining quality and then shifted again sharply back towards high quality, although now requiring government intervention for support. This same pattern was seen across a number of different characteristics of the market. This paper shows how and why the shift happened from an evolutionary perspective and discusses the implications of this kind of behavior for understanding this period and also for possible developments in the future.

Suggested Citation

  • James P. Dow, 2016. "Mortgage originations during 2002-2007 as an example of an evolutionary market," Journal of Evolutionary Economics, Springer, vol. 26(5), pages 1007-1032, December.
    • Handle: RePEc:spr:joevec:v:26:y:2016:i:5:d:10.1007_s00191-016-0471-7
    DOI: 10.1007/s00191-016-0471-7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00191-016-0471-7
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s00191-016-0471-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Keys, Benjamin J. & Mukherjee, Tanmoy & Seru, Amit & Vig, Vikrant, 2009. "Financial regulation and securitization: Evidence from subprime loans," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 700-720, July.
    2. Giovanni Dosi & Richard R. Nelson, 2000. "An Introduction to Evolutionary Theories in Economics," Chapters, in: Innovation, Organization and Economic Dynamics, chapter 11, pages 327-346, Edward Elgar Publishing.
    3. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1848-1880.
    4. Armen A. Alchian, 1950. "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy, University of Chicago Press, vol. 58(3), pages 211-211.
    5. Rajdeep Sengupta, 2010. "Alt-A: the forgotten segment of the mortgage market," Review, Federal Reserve Bank of St. Louis, vol. 92(Jan), pages 55-72.
    6. Michael LaCour-Little & Jing Yang, 2013. "Taking the Lie Out of Liar Loans: The Effect of Reduced Documentation on the Performance and Pricing of Alt-A and Subprime Mortgages," Journal of Real Estate Research, American Real Estate Society, vol. 35(4), pages 507-554.
    7. Calem, Paul & Henderson, Christopher & Liles, Jonathan, 2011. ""Cherry picking" in subprime mortgage securitizations: Which subprime mortgage loans were sold by depository institutions prior to the crisis of 2007?," Journal of Housing Economics, Elsevier, vol. 20(2), pages 120-140, June.
    8. Christopher Mayer & Karen Pence & Shane M. Sherlund, 2009. "The Rise in Mortgage Defaults," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 27-50, Winter.
    9. Kristopher Gerardi & Andreas Lehnert & Shane M. Sherlund & Paul Willen, 2008. "Making Sense of the Subprime Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 39(2 (Fall)), pages 69-159.
    10. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    11. Longstaff, Francis A., 2010. "The subprime credit crisis and contagion in financial markets," Journal of Financial Economics, Elsevier, vol. 97(3), pages 436-450, September.
    12. Franco Malerba & Luigi Orsenigo, 2002. "Innovation and market structure in the dynamics of the pharmaceutical industry and biotechnology: towards a history-friendly model," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 11(4), pages 667-703, August.
    13. Amiyatosh Purnanandam, 2011. "Originate-to-distribute Model and the Subprime Mortgage Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1881-1915.
    14. Bryan J. Noeth & Rajdeep Sengupta, 2011. "Changes in the mortgage market since the crisis," Economic Synopses, Federal Reserve Bank of St. Louis.
    15. Richard R. Nelson, 1995. "Recent Evolutionary Theorizing about Economic Change," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 48-90, March.
    16. Benjamin J. Keys & Amit Seru & Vikrant Vig, 2012. "Lender Screening and the Role of Securitization: Evidence from Prime and Subprime Mortgage Markets," The Review of Financial Studies, Society for Financial Studies, vol. 25(7), pages 2071-2108.
    17. Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive wp_74, Levy Economics Institute.
    18. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(1), pages 307-362.
    19. Agarwal, Sumit & Chang, Yan & Yavas, Abdullah, 2012. "Adverse selection in mortgage securitization," Journal of Financial Economics, Elsevier, vol. 105(3), pages 640-660.
    20. LaCour-Little, Michael & Calhoun, Charles A. & Yu, Wei, 2011. "What role did piggyback lending play in the housing bubble and mortgage collapse?," Journal of Housing Economics, Elsevier, vol. 20(2), pages 81-100, June.
    21. Malerba, Franco, et al, 1999. "'History-Friendly' Models of Industry Evolution: The Computer Industry," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 8(1), pages 3-40, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gene Amromin & Jennifer Huang & Clemens Sialm & Edward Zhong, 2018. "Complex Mortgages [Why don’t lenders renegotiate more home mortgages? Redefaults, self-cures, and securitization]," Review of Finance, European Finance Association, vol. 22(6), pages 1975-2007.
    2. Ing-Haw Cheng & Sahil Raina & Wei Xiong, 2014. "Wall Street and the Housing Bubble," American Economic Review, American Economic Association, vol. 104(9), pages 2797-2829, September.
    3. Sumit Agarwal & Yongheng Deng & Jia He & Yonglin Wang & Qi Zhang, 2023. "Lenders’ pricing strategy: Do neighborhood risks matter?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(4), pages 1011-1047, July.
    4. Nadauld, Taylor D. & Sherlund, Shane M., 2013. "The impact of securitization on the expansion of subprime credit," Journal of Financial Economics, Elsevier, vol. 107(2), pages 454-476.
    5. Nam, Tong-yob & Oh, Seungjoon, 2021. "Non-recourse mortgage law and housing speculation," Journal of Banking & Finance, Elsevier, vol. 133(C).
    6. Tomasz Piskorski & Amit Seru & James Witkin, 2015. "Asset Quality Misrepresentation by Financial Intermediaries: Evidence from the RMBS Market," Journal of Finance, American Finance Association, vol. 70(6), pages 2635-2678, December.
    7. José María Liberti & Mitchell A. Petersen, 2018. "Information: Hard and Soft," NBER Working Papers 25075, National Bureau of Economic Research, Inc.
    8. Levitin, Adam & Wachter, Susan, 2012. "Explaining the Housing Bubble," MPRA Paper 41920, University Library of Munich, Germany.
    9. Xu, Yilan, 2014. "Does mortgage deregulation increase foreclosures? Evidence from Cleveland," Regional Science and Urban Economics, Elsevier, vol. 46(C), pages 126-139.
    10. Demyanyk, Yuliya & Loutskina, Elena, 2016. "Mortgage companies and regulatory arbitrage," Journal of Financial Economics, Elsevier, vol. 122(2), pages 328-351.
    11. Deku, Solomon Y. & Kara, Alper & Zhou, Yifan, 2019. "Securitization, bank behaviour and financial stability: A systematic review of the recent empirical literature," International Review of Financial Analysis, Elsevier, vol. 61(C), pages 245-254.
    12. Griffin, John M. & Kruger, Samuel & Maturana, Gonzalo, 2021. "What drove the 2003–2006 house price boom and subsequent collapse? Disentangling competing explanations," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1007-1035.
    13. James N. Conklin & Moussa Diop & Thao Le & Walter D’Lima, 2019. "The Importance of Originator-Servicer Affiliation in Loan Renegotiation," The Journal of Real Estate Finance and Economics, Springer, vol. 59(1), pages 56-89, July.
    14. Claudine Gartenberg, 2014. "Do Parents Matter? Effects of Lender Affiliation Through the Mortgage Boom and Bust," Management Science, INFORMS, vol. 60(11), pages 2776-2793, November.
    15. Mayer, Chris & Piskorski, Tomasz & Tchistyi, Alexei, 2013. "The inefficiency of refinancing: Why prepayment penalties are good for risky borrowers," Journal of Financial Economics, Elsevier, vol. 107(3), pages 694-714.
    16. Bubb, Ryan & Kaufman, Alex, 2014. "Securitization and moral hazard: Evidence from credit score cutoff rules," Journal of Monetary Economics, Elsevier, vol. 63(C), pages 1-18.
    17. Adelino, Manuel & Scott Frame, W. & Gerardi, Kristopher, 2017. "The effect of large investors on asset quality: Evidence from subprime mortgage securities," Journal of Monetary Economics, Elsevier, vol. 87(C), pages 34-51.
    18. Xiao, Shuhua & Zhu, Shushang & Wu, Ying, 2023. "Asset securitization, cross holdings, and systemic risk in banking," Journal of Financial Stability, Elsevier, vol. 67(C).
    19. Hanming Fang & You Suk Kim & Wenli Li, 2015. "The Dynamics of Adjustable-Rate Subprime Mortgage Default: A Structural Estimation," Finance and Economics Discussion Series 2015-114, Board of Governors of the Federal Reserve System (U.S.).
    20. Giovanni Favara & Mariassunta Giannetti, 2017. "Forced Asset Sales and the Concentration of Outstanding Debt: Evidence from the Mortgage Market," Journal of Finance, American Finance Association, vol. 72(3), pages 1081-1118, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:joevec:v:26:y:2016:i:5:d:10.1007_s00191-016-0471-7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.