A worthwhile read

SSRN-Understanding the Subprime Mortgage Crisis by Yuliya Demyanyk, Otto van Hemert

Understanding the Subprime Mortgage Crisis

Federal Reserve Bank of St. Louis – Banking Supervision and Regulation
New York University – Department of Finance October 9, 2007

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.

It was not just floating rate loans originated in 2006, but all 2006 vintage loan types—fixed rate, etc— with high default rates.  The debt to value ratio seems to matter the most in explaining the increase in risk.   But the effect of high debt to value is much worse for loans originated in 2006 than loans originated in  2001 in terms of predicting problems.  Evidence I guess about who were getting the loans in different periods.  Mortgage rates adjusted for the risk; lenders tried to compensate.  We don’t know if it is enough yet.

via: http://www.marginalrevolution.com

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