Making Sense of the Subprime Crisis

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. However, the authors show that while loans originated in this period did carry extra risk factors, particularly increased leverage, underwriting standards alone cannot explain the dramatic rise in foreclosures. Focusing on the role of house prices, the authors ask whether market participants underestimated the likelihood of a fall in house prices or the sensitivity of foreclosures to house prices. The authors show that, given available data, market participants should have been able to understand that a significant fall in prices would cause a large increase in foreclosures, although loan-level (as opposed to ownership-level) models would have predicted a smaller rise than actually occurred. Examining analyst reports and other contemporary discussions of the mortgage market to see what market participants thought would happen, the authors find that analysts, on the whole, understood that a fall in prices would have disastrous consequences for the market but assigned a low probability to such an outcome. Terms of use: Documents in

Natural Expectations and Macroeconomic Fluctuations

“…For instance, Goetzman, Peng and Yen (2009) find that cities with higher past price increases experienced higher demand for mortgages, and, at least for subprime loans, higher approval probabilities. Relatedly, Gerardi et al (2008) show that many mortgage market participants in 2005 and 2006 were aware that, if house prices fall, many mortgage borrowers would default. However, market participants only assigned a very low probability to such an event.…”

Subprime mortgage default

“…References in this regard, expressly concerned with the subprime crisis, include Foote et al (2008), Gerardi et al (2007), Sherlund (2008), Demyanyk and Van Hemert (2011), Gerardi et al (2009), Bajari et al (2008, Elul et al (2010), andHaughwout et al (2009). The paper most similar to our first-stage analysis, in terms of approach, is Sherlund (2008), who also works within a competing hazard framework and who employs covariates similar to ours.…”

More punishment, less default?

“…13 See e.g. Gerardi et al (2007Gerardi et al ( , 2008Gerardi et al ( , 2009 or Guiso et al (forthcoming). 14 See, e.g., Gerardi et al (2007Gerardi et al ( , 2008Gerardi et al ( , 2009).…”

“…See also Araujo et al (1998Araujo et al ( , 2005. 5 The fast growing literature on the foreclosure crisis includes Chatterjee and Eyigungor (2009), Foote et al (2008a), ), Gerardi et al (2007, 2008. 6 See e.g.…”