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Working Paper
Understanding the subprime mortgage crisis
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.
AUTHORS: Demyanyk, Yuliya; Otto Van Hemert
DATE: 2007
Journal Article
Ten myths about subprime mortgages
On close inspection many of the most popular explanations for the subprime crisis turn out to be myths. Empirical research shows that the causes of the subprime mortgage crisis and its magnitude were more complicated than mortgage interest rate resets, declining underwriting standards, or declining home values. Nor were its causes unlike other crises of the past. The subprime crisis was building for years before showing any signs and was fed by lending, securitization, leveraging, and housing booms.
AUTHORS: Demyanyk, Yuliya
DATE: 2009
Journal Article
Underwriting on subprime mortgages: what really happened?
How did poor underwriting bring about the collapse of the subprime mortgage market? More importantly, how would subprime mortgages perform if underwriting standards did not deteriorate?
AUTHORS: Noeth, Bryan J.; Sengupta, Rajdeep
DATE: 2010
Journal Article
Booms and busts: the case of subprime mortgages
Booms and busts have played a prominent role in American economic history. In the 19th century, the United States benefited from the canal boom, the railroad boom, the minerals boom, and a financial boom. The 20th century brought another financial boom, a postwar boom, and a dot-com boom. ; The details differed, but each of these cases featured initial discoveries or breakthroughs, widespread adoption, widespread investment, and then a collapse where prices could not keep up and many investors lost a lot of money. When the dust cleared, there was financial carnage and many investors learning to be more careful the next time. But fruits of the boom were still around to benefit productivity. ; The late Edward M. Gramlich prepared the luncheon address for the Federal Reserve Bank of Kansas City?s 2007 symposium last summer in Jackson Hole, Wyoming. This article, based on his speech, describes why he believed the subprime lending market, despite its problems, is a promising development that has permitted low-income and minority borrowers to participate in credit markets.
AUTHORS: Gramlich, Edward M.
DATE: 2007
Journal Article
Why HARM the subprime borrower?
Hybrid adjustable rate mortgages (HARM) were designed to be refinanced by the reset date, when the interest rate would jump. These mortgages worked out well for many people who were credit risks - but only as long as housing prices continued to rise.
AUTHORS: Tam, Yu Man; Sengupta, Rajdeep
DATE: 2010
Journal Article
Did credit scores predict the subprime crisis?
One would think that credit scores would be a predictor of who would default on a subprime mortgage. But that doesn't seem to be the case.
AUTHORS: Demyanyk, Yuliya
DATE: 2008
Journal Article
Quick exits of subprime mortgages
All holders of mortgage contracts, regardless of type, have three options: keep their payments current, prepay (usually through refinancing), or default on the loan. The latter two options terminate the loan. The termination rates of subprime mortgages that originated each year from 2001 through 2006 are surprisingly similar: about 20, 50, and 80 percent, respectively, at one, two, and three years after origination. For loans originated when house prices appreciated the most, terminations were dominated by prepayments. For loans originated when the housing market slowed, defaults dominated. The similarity of the loan termination rates for all vintages in the sample suggests that subprime mortgage loans were intended to be "bridge" (i.e., temporary) loans. In addition, between 2001 and 2006, the number of terminated subprime purchase-money loans (loans used to purchase rather than refinance a house) outweighed the estimated number of first-time-homebuyers with subprime mortgages. The effect of the subprime lending on the increase of homeownership in the United States-a potentially positive outcome of subprime mortgages-most likely has been overstated.
AUTHORS: Demyanyk, Yuliya
DATE: 2009
Working Paper
Differences in subprime loan pricing across races and neighborhoods
We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood- level data on racial and ethnic characteristics for metropolitan areas in California and Florida. Using a model of rate determination that accounts for predicted loan performance, we evaluate the differences in subprime mortgage rates in terms of racial and ethnic groups and neighborhood characteristics. We find evidence of adverse pricing for blacks and Hispanics. The evidence of adverse pricing is strongest for purchase mortgages and mortgages originated by non-depository institutions.
AUTHORS: Ghent, Andra C.; Hernandez-Murillo, Ruben; Owyang, Michael T.
DATE: 2011
Working Paper
Where's the smoking gun? a study of underwriting standards for US subprime mortgages
The dominant explanation for the meltdown in the US subprime mortgage market is that lending standards dramatically weakened after 2004. Using loan-level data, we examine underwriting standards on the subprime mortgage originations from 1998 to 2007. Contrary to popular belief, we find no evidence of a dramatic weakening of lending standards within the subprime market. We show that while underwriting may have weakened along some dimensions, it certainly strengthened along others. Our results indicate that (average) observable risk characteristics on mortgages underwritten post-2004 would have resulted in a significantly lower ex post default if they were to be given a loan in 2001 or 2002. We show that while it is possible that underwriting standards in this market were poor to begin with, deterioration in underwriting post-2004 cannot be the explanation for collapse of subprime mortgage market.
AUTHORS: Bhardwaj, Geetesh; Sengupta, Rajdeep
DATE: 2008
Working Paper
The effect of neighborhood contagion on mortgage selection
In this paper we conduct an empirical investigation of how neighborhood mortgage adoption contagion affects mortgage product choice, with an emphasis on Hispanic borrowers. We use loan-level mortgage data for metropolitan areas in California and Florida during 2004 and 2005, the peak years of the subprime mortgage boom. We identify an important and statistically significant effect of contagion on consumer choice of hybrid mortgage products that were popular during this period, especially for Hispanic borrowers.
AUTHORS: Hernandez-Murillo, Ruben; Sengupta, Rajdeep
DATE: 2011