RFS Advance Access published online on May 4, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp033
Understanding the Subprime Mortgage Crisis
Federal Reserve Bank of Cleveland
Stern School of Business, New York University
Send correspondence to Yuliya Demyanyk, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101; telephone: 216-579-2041, fax: 216-579-3050. E-mail: Yuliya.Demyanyk{at}clev.frb.org.
JEL Classification: D12, G01, G12, G20, G21
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Abstract |
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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 authors would like to thank the executive editor Matthew Spiegel and the anonymous referee for valuable suggestions, as well as Cliff Asness, Joost Driessen, William Emmons, Emre Ergungor, Scott Frame, Xavier Gabaix, Dwight Jaffee, Ralph Koijen, Andreas Lehnert, Andrew Leventis, Chris Mayer, Andrew Meyer, Toby Moskowitz, Lasse Pedersen, Robert Rasche, Matt Richardson, Stefano Risa, Bent Sorensen, Stijn Van Nieuwerburgh, James Vickery, Jeff Wurgler, and seminar participants at the Federal Reserve Bank of St. Louis; the Florida Atlantic University; the International Monetary Fund; the second New York Fed—Princeton liquidity conference; Lehman Brothers; the Baruch-Columbia-Stern real estate conference; NYU Stern Research Day; Capula Investment Management; AQR Capital Management; the Conference on the Subprime Crisis and Economic Outlook in 2008 at Lehman Brothers; Freddie Mac; Federal Deposit and Insurance Corporation (FDIC); U.S. Securities and Exchange Comission (SEC); Office of Federal Housing Enterprise Oversight (OFHEO); Board of Governors of the Federal Reserve System; Carnegie Mellon University; Baruch; University of British Columbia, University of Amsterdam; the 44th Annual Conference on Bank Structure and Competition at the Federal Reserve Bank of Chicago; the Federal Reserve Research and Policy Activities; Sixth Colloquium on Derivatives, Risk-Return and Subprime, Lucca, Italy; and the Federal Reserve Bank of Cleveland. The views expressed are those of the authors and do not necessarily reflect the official positions of the Federal Reserve Bank of Cleveland or the Federal Reserve System.