Subprime Facts: What (We Think) We Know about the Subprime Crisis and What We Don't

Abstract

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An Empirical Model of Subprime Mortgage Default From 2000 to 2007

“…18 Second, borrower and loan characteristics a¤ecting borrowers'ability to pay are as empirically important in predicting default as declining house prices, as evidenced by the magnitudes of the marginal e¤ects in Tables 5 and 6. 19 Our results suggest that the increase in defaults in recent years is partly linked to changes over time in the composition of mortgage recipients. Higher numbers of borrowers who have little documentation, low FICO scores, or multiple liens on the same property contributed to the increase in foreclosures in the subprime mortgage market.…”

Negative equity and foreclosure: Theory and evidence

“…In these cases it is hard to argue that the payments are now "unafford-able." Furthermore, we argue elsewhere [Foote, Gerardi, Goette, and Willen (2008)] that there is little evidence that the resets of adjustable rate mortgages cause systematic delinquency or foreclosure. The point is that even in this most recent housing downturn, most foreclosures result from life events, and an effective response must address current and future life events, not just past ones.…”

“…Cash-flow problems without widespread negative equity do not cause foreclosure waves. 2 Even if borrowers are having trouble making payments, they will always prefer to sell their homes rather than default, as long as equity in their homes is positive so they can pay off their outstanding mortgage balances with the proceeds of the sales. Similarly, widespread negative equity will not result in a foreclosure boom in the absence of cash-flow problems.…”

“…Lenders often attempt to mitigate foreclosurerelated losses by extending assistance to borrowers, but in doing so, they face an incomplete information problem. 3 To lenders, the cost of an assistance policy depends 2 The 2001 U.S. recession is a good example. 3 In the remainder of this paper we refer to the party that is entitled to the interest and principal on how many borrowers qualify for assistance (that is, how many borrowers are currently in a position of negative equity).…”

Making Sense of the Subprime Crisis

“…However, the evidence from loan-level data shows that resets cannot account for a significant portion of the increase in foreclosures. Both Mayer, Pence, and Sherlund (2008) and Foote, Gerardi, Goette, and Willen (2007) show that the overwhelming majority of defaults on subprime adjustable-rate mortgages (ARM) occur long before the first reset. In other words, many lenders would have been lucky had borrowers waited until the first reset to default.…”