Download pdf: http://adf.ly/At79l

Understanding the Subprime Mortgage Crisis

Yuliya S. Demyanyk 

Federal Reserve Bank of Cleveland

Otto Van Hemert 

New York University (NYU) - Department of Finance 
December 5, 2008

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.

Number of Pages in PDF File: 40