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Understanding the subprime mortgage crisis

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  • Otto Van Hemert
  • Yuliya Demyanyk

Abstract

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. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org., Oxford University Press.
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Suggested Citation

  • Otto Van Hemert & Yuliya Demyanyk, 2008. "Understanding the subprime mortgage crisis," Proceedings 1092, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhpr:1092
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    Keywords

    Mortgage loans; Subprime mortgage; Foreclosure;

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