Ebook Money for Nothing and Checks for Free: Recent Developments in U.S. Subprime Mortgage Markets
After a number of warning signs, the U.S. “subprime mortgage crisis” became a headline issue in February 2007. Notwithstanding the bankruptcy of numerous mortgage companies, historically high delinquencies and foreclosures, and a significant tightening in subprime lending standards, the impact thus far on core U.S. financial institutions has been limited. And while some structured credit hedge funds have suffered large losses, mortgage securitization appears to have helped disperse the impact throughout the financial system, in contrast to the Savings & Loan crisis of the early 1990s.
The credit cycle is thus largely playing out in the securities and derivatives markets, rather than on bank balance sheets. This paper reviews the history and structure of the subprime market.
The results suggest that new origination and funding technology appear to have made the financial system more stable at the expense of undermining the effectiveness of consumer protection regulation. Potential solutions to the management of this trade-off are then explored.
Contents
I. Introduction
II. Origins and History of the Subprime Mortgage Market
III. The Rapid Recent Expansion of Subprime Lending
IV. What Prompted the Subprime “Crisis?”
V. The Impact on Financial Institutions
VI. The Impact on Households
VII. Risk Management and Consumer Protection in the Securitization Model
VIII. Resolving the Policy Trade-off: Palliatives versus Future Reforms
- A. Palliatives
B. Future Reforms
IX. Conclusion
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