The Role of Subprime Mortgages

Bank Exposure to Commercial Real Estate
by Yuliya Demyanyk and Kent Cherny
in Federal Reserve Bank of Cleveland Economic Trends, August 2009

As rising home foreclosures and delinquencies continue to undermine a financial and economic recovery, an increasing amount of attention is being paid to another corner of the property market: commercial real estate. This article discusses bank exposure to the commercial real estate market.

Booms and Busts: The Case of Subprime Mortgages
by Edward M. Gramlich
in Federal Reserve Bank of Kansas City Economic Review, September 2007

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 init...  

Changes in the U.S. Financial System and the Subprime Crisis
by Jan Kregel
in Levy Economics Institute Working Paper, April 2008

The paper provides a background to the forces that have produced the present system of residential housing finance, the reasons for the current crisis in mortgage financing, and the impact of the crisis on the overall financial system.

The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis
by Atif R. Mian, Amir Sufi
in SSRN Working Paper, December 2008

We conduct a within-county analysis using detailed zip code level data to document new findings regarding the origins of the biggest financial crisis since the Great Depression. The recent sharp increase in mortgage defaults is significantly amplified in subprime zip codes, or zip codes with a disproportionately large share of subprime borrowers as...  

Did Credit Scores Predict the Subprime Crisis?
by Yuliya Demyanyk
in Federal Reserve Bank of St. Louis Regional Economist, October 2008

One might expect to find a connection between borrowers' FICO scores and the incidence of default and foreclosure during the current crisis. The data don't show such a cause and effect, however.

Did Prepayments Sustain the Subprime Market?
by Geetesh Bhardwaj and Rajdeep Sengupta
in Federal Reserve Bank of St. Louis Working Paper, October 2008

This paper demonstrates that the reason for widespread default of mortgages in the subprime market was a sudden reversal in the house price appreciation of the early 2000's. Using loan-level data on subprime mortgages, we observe that the majority of subprime loans were hybrid adjustable rate mortgages, designed to impose substantial financial ...  

Economic Recovery and Balance Sheet Normalization
by Narayana R. Kocherlakota
in Federal Reserve Bank of Minneapolis, April 2010

Speech before the Minnesota Chamber of Commerce

The Evolution of the Subprime Mortgage Market
by Souphala Chomsisengphet and Anthony Pennington-Cross
in Federal Reserve Bank of St. Louis Review, January 2006

This paper describes subprime lending in the mortgage market and how it has evolved through time. Subprime lending has introduced a substantial amount of risk-based pricing into the mortgage market by creating a myriad of prices and product choices largely determined by borrower credit history (mortgage and rental payments, foreclosures and bankru...  

Have the Fed Liquidity Facilities Had an Effect on Libor?
by Jens Christensen
in Federal Reserve Bank of San Francisco Economic Letter, August 2009

In response to turmoil in the interbank lending market, the Federal Reserve inaugurated programs to bolster liquidity beginning in December 2007. Research offers evidence that these liquidity facilities have helped lower the London interbank offered rate, a key market benchmark, significantly from what it otherwise would have been expected to be.

Housing, Mortgage Markets, and Foreclosures at the Federal Reserve System Conference on Housing and Mortgage Markets, Washington, D.C.
by Ben Bernanke
in Speech, December 2008

Housing and housing finance played a central role in precipitating the current crisis. Declining house prices, delinquencies and foreclosures, and strains in mortgage markets are now symptoms as well as causes of our general financial and economic difficulties. The most effective approach very likely will involve a full range of coordinated measu...  

Lending Standards in Mortgage Markets
by Carlos Garriga,
in Federal Reserve Bank of St. Louis Economic Synopses, May 2009

Examines the mortgage denial rates by loan type as an indicator of loose lending standards.

Macroprudential Supervision of Financial Institutions: Lessons from the SCAP
by Beverly Hirtle, Til Schuermann, and Kevin Stiroh
in Federal Reserve Bank of New York Staff Reports, November 2009

A fundamental conclusion drawn from the recent financial crisis is that the supervision and regulation of financial firms in isolation—a purely microprudential perspective—are not sufficient to maintain financial stability. Rather, a macroprudential perspective, which evaluates and responds to the financial system as a whole, seems necessary, and t...  

Monetary Policy in the Crisis: Past, Present, and Future
by Donald L. Kohn
in Board of Governors Speech, January 2010

Speech given at the Brimmer Policy Forum, American Economic Association Annual Meeting, Atlanta, Georgia

Paulson’s Gift
by Pietro Veronesi and Luigi Zingales
in NBER Working Paper, October 2009

The authors calculate the costs and benefits of the largest ever U.S. Government intervention in the financial sector announced the 2008 Columbus-day weekend. They estimate that this intervention increased the value of banks’ financial claims by $131 billion at a taxpayers’ cost of $25 -$47 billions with a net benefit between $84bn and $107bn. B...  

Quantitative Easing—Uncharted Waters for Monetary Policy
by James Bullard
in Federal Reserve Bank of St. Louis Regional Economist, January 2010

A discussion of the use of quantiative easing in monetary policy

Quick Exits of Subprime Mortgages
by Yuliya S. Demyanyk
in Federal Reserve Bank of St. Louis Review, March 2009

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 8...  

The Subprime Crisis: Cause, Effect and Consequences
by R. Christopher Whalen
in SSRN Working Paper, June 2008

Despite the considerable media attention given to the collapse of the market for complex structured assets that contain subprime mortgages, there has been too little discussion of why this crisis occurred. The Subprime Crisis: Cause, Effect and Consequences argues that three basic issues are at the root of the problem, the first of which is an odio...  

Subprime Facts: What (We Think) We Know about the Subprime Crisis and What We Don't
by Christopher L. Foote, Kristopher Gerardi, Lorenz Goette and Paul S. Willen
in Federal Reserve Bank of Boston Public Policy Discussion Paper, May 2008

Using a variety of datasets, the authors document some basic facts about the current subprime crisis. Many of these facts are applicable to the crisis at a national level, while some illustrate problems relevant only to Massachusetts and New England. The authors conclude by discussing some outstanding questions about which the data, which they beli...  

Subprime Lending and Real Estate Markets
by Susan M. Wachter, Andrey D. Pavlov, and Zoltan Pozsar
in SSRN Working Paper, December 2008

The recent credit crunch, and liquidity deterioration, in the mortgage market have led to falling house prices and foreclosure levels unprecedented since the Great Depression. A critical factor in the post-2003 house price bubble was the interaction of financial engineering and the deteriorating lending standards in real estate markets, which fed o...  

The Subprime Turmoil: What's Old, What's New, and What's Next
by Charles W. Calomiris
in Federal Reserve Bank of Kansas City's Symposium: Maintaining Stability in a Changing Financial System", October 2008

We are currently experiencing a major shock to the financial system, initiated by problems in the subprime market, which spread to securitization products and credit markets more generally. Banks are being asked to increase the amount of risk that they absorb (by moving off-balance sheet assets onto their balance sheets), but losses that the banks...  

Understanding the Securitization of Subprime Mortgage Credit
by Adam B. Ashcraft and Til Schuermann
in Federal Reserve Bank of New York Staff Reports, March 2008

In this paper, the authors provide an overview of the subprime mortgage securitization process and the seven key informational frictions that arise. They discuss the ways that market participants work to minimize these frictions and speculate on how this process broke down. They continue with a complete picture of the subprime borrower and the subp...  

Understanding the Subprime Mortgage Crisis
by Yuliya Demyanyk and Otto Van Hemert
in SSRN Working Paper, December 2008

In this paper the authors 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.

What the Libor-OIS Spread Says
by Daniel L. Thornton
in Federal Reserve Bank of St. Louis Economic Synopses, May 2009

This paper offers a discussion of the current Libor-OIS rate spread, and what that rate implies for the health of banks.

Where's the Smoking Gun? A Study of Underwriting Standards for US Subprime Mortgages
by Geetesh Bhardwaj and Rajdeep Sengupta
in Federal Reserve Bank of St. Louis Working Paper, October 2008

The dominant explanation for the meltdown in the US subprime mortgage market is that lending standards dramatically weakened after 2004. Using loan-level data, Bhardwaj and Sengupta examine underwriting standards on the subprime mortgage originations from 1998 to 2007. Contrary to popular belief, the authors find no evidence of a dramatic weakening...  

A Word on the Economy
by Julie L. Stackhouse
in Federal Reserve Bank of St. Louis Educational Resources, September 2009

A powerpoint slideshow describing the subprime mortgage meltdown and how it relates to the overall financial crisis. Updated September 2009