The U.S. Subprime Mortgage Crisis
The U.S. Subprime Mortgage Crisis
The subprime mortgage crisis ranks among the most serious economic events affecting the United States since the great depression of the 1930s. This study analyzes key issues raised by the crisis at three levels: (i) issues directly and specifically relating to subprime mortgage lending; (ii) issues relating to the securitization of subprime mortgages; and (iii) issues affecting financial markets and institutions. These issues are fundamental to risk bearing, sharing, and transfer in financial markets and institutions around the world. Many of the issues raised by the U.S. subprime crisis also apply to high-risk loan markets in developing countries. The framework applied in the paper analyzes subprime mortgage lending as a major financial market innovation. Although conditions were conducive for subprime lending to arise as a financial innovation, financial innovations are necessarily risky undertakings, all the more so when they create new classes of risky loans and securities. The lessons learned from the crisis can thus be usefully applied to issues of the growth and development of emerging economies, as well as pointing the way to the design of new and efficient policies for subprime lending in the developed economies.
- World Bank United States
MARKET DEVELOPMENTS, SETTLEMENT SYSTEMS, MORTGAGE MARKETS, DEPOSIT, INFLATION, LIQUIDATION, REGULATORY STRUCTURE, CREDIT CARD, LOAN DEFAULTS, ILLIQUID MARKETS, MORTGAGE MARKET, FEDERAL RESERVE, INDIVIDUAL LOAN, DUE DILIGENCE, CAPITAL REQUIREMENTS, LOAN APPLICATIONS, DERIVATIVE MARKETS, RETURNS, DEBT SERVICE, TRANCHES, COLLATERAL, PENSION, COUPONS, MORTGAGE LOAN, FLOATING RATES, FINANCIAL MARKET, DEBT RATIOS, FRAUD, MORAL HAZARD, MARK TO MARKET ACCOUNTING, CONTRACT DESIGNS, EXCHANGE COMMISSION, MORTGAGE, FINANCIAL MARKETS, EMERGING ECONOMIES, INSTITUTIONAL INVESTORS, HOLDING, DEPOSITS, CREDITORS, AUCTION, DIVERSIFIED PORTFOLIOS, CREDIT RATINGS, PROPERTY RIGHTS, OUTSTANDING AMOUNT, COMMERCIAL PAPER MARKET, MONETARY POLICY, GOVERNMENT GUARANTEE, LOAN MARKETS, INTEREST RATES, MORTGAGES, DEBT OBLIGATIONS, FINANCIAL RISK, SHORT-TERM BORROWINGS, AUTO LOANS, CONSUMER PROTECTION LEGISLATION, FINANCIAL SERVICE PROVIDERS, PROBABILITY OF DEFAULT, MARKET PRICES, HEDGE FUNDS, DEBT OUTSTANDING, DERIVATIVE INSTRUMENTS, PORTFOLIO, BANKRUPTCY, INVESTMENT ACTIVITIES, LENDERS, LEGAL SYSTEM, LENDER, PRINCIPAL PAYMENTS, MARKET PARTICIPANTS, DERIVATIVES, LIQUIDITY CRISES, CAPITAL MARKETS, HEDGE FUND, CREDITWORTHINESS, REGULATORY FRAMEWORK, FINANCIAL SYSTEM, LIABILITY, FINANCIAL INSTITUTIONS, INVESTMENT DECISIONS, FOREIGN CAPITAL, CURRENCY, HOME LOAN, NATURAL DISASTERS, CATASTROPHE BONDS, COMMERCIAL MORTGAGE, ASSET MANAGERS, INVESTOR LOSSES, DEBT SECURITIES, STOCK BROKERS, LOAN, NATURAL DISASTER, FINANCIAL DEVELOPMENT, DEVELOPING COUNTRIES, MATURITY, SECURITIES, LOAN TERMS, HOME MORTGAGE, CREDIT RATING, INVESTMENT STRATEGIES, GOVERNMENT REGULATION, MARKET FAILURES, LIEN, CREDIT QUALITY, INVESTMENT FUNDS, TRADING, LOCAL BANK, ILLIQUIDITY, LEGAL PROHIBITIONS, EMERGING ECONOMY, UNDERLYING MORTGAGES, OUTSTANDING LOANS, MARKET ECONOMY, TRANSACTION, CREDIT ENHANCEMENTS, TAX, CONSUMER BORROWERS, BANKING SYSTEM, INDIVIDUAL INVESTORS, INVENTORY, LOAN PERFORMANCE, STOCK MARKET, COMMERCIAL MORTGAGES, ECONOMIC GROWTH, GOVERNMENT GUARANTEES, MORTGAGE FINANCE, TRANSACTION COSTS, INTERNATIONAL SETTLEMENTS, DEBT OBLIGATION, RISK OF DEFAULT, DERIVATIVE MARKET, CREDIT DEFAULT SWAPS, BENEFICIARIES, BANK INVESTORS, INSTRUMENT, BAILOUT, BROKERS, FUTURES MARKET, FINANCIAL CRISIS, MARKET STABILITY, LONG-TERM CAPITAL, MARKET LIQUIDITY, CREDIT RATING AGENCIES, CONSUMER PROTECTION, DEPOSITORY INSTITUTIONS, SETTLEMENT, RISK MANAGEMENT, FORECLOSURE, COMMERCIAL PAPER, 330, TREASURY BONDS, BORROWER, LOAN APPLICATION, LONG TERM CAPITAL, INVESTMENT VEHICLES, MARK TO MARKET, DEFAULT RISK, TRANCHE, LOANABLE FUNDS, FINANCIAL DISTRESS, LINE OF CREDIT, FORECLOSURES, FUTURES, MARKET VALUE, DEBT INSTRUMENTS, DEFAULTS, CONSUMER LOANS, INTEREST RATE RISK, DEBT, MORTGAGE-BACKED SECURITIES, RISKY LOAN, ASYMMETRIC INFORMATION, DEFAULT RATE, DEFAULT PROBABILITIES, INVESTMENT PORTFOLIOS, MONETARY POLICIES, RETURN, COUPON, MARKET DISCIPLINE, LONG-TERM DEBT, LOAN DEMANDS, CAPITAL MARKET, SECURITIES INDUSTRY, REAL ESTATE COLLATERAL, RISK ASSESSMENTS, RISKY LOANS, REAL ESTATE LOANS, DEFICITS, FOREIGN EXCHANGE, BANK LENDERS, INVESTMENT POLICY, ACCOUNTING, LOAN DEFAULT, PORTFOLIOS, COMMERCIAL BANK, MARKET TRADING, CREDIT DEFAULT, VARIABLE RATE, ARBITRAGE, INTERNATIONAL DEVELOPMENT, BANKING REGULATIONS, PRUDENTIAL REGULATION, INSURANCE, MATURITY MISMATCHES, TRANSITION ECONOMIES, INVESTMENT STRATEGY, MORTGAGE BONDS, MORTGAGE LOANS, TREASURY, MATURITY MISMATCH, DIVERSIFIED INVESTORS, EXPENDITURES, COMMERCIAL BANKS, COMPETITIVE MARKET, INTERNATIONAL BANK, MONETARY AUTHORITY, HOMEOWNERSHIP, LOAN VOLUMES, CONTRACT DESIGN, INVESTMENT BANKS, FISCAL POLICIES, RISKY SECURITIES, INVESTMENT BANK, DERIVATIVE, ASSET CLASS, HOME MORTGAGES, INTEREST RATE, UNDERWRITERS, LOAN OFFICERS, ASSET-BACKED SECURITIES, DEFAULT RATES
MARKET DEVELOPMENTS, SETTLEMENT SYSTEMS, MORTGAGE MARKETS, DEPOSIT, INFLATION, LIQUIDATION, REGULATORY STRUCTURE, CREDIT CARD, LOAN DEFAULTS, ILLIQUID MARKETS, MORTGAGE MARKET, FEDERAL RESERVE, INDIVIDUAL LOAN, DUE DILIGENCE, CAPITAL REQUIREMENTS, LOAN APPLICATIONS, DERIVATIVE MARKETS, RETURNS, DEBT SERVICE, TRANCHES, COLLATERAL, PENSION, COUPONS, MORTGAGE LOAN, FLOATING RATES, FINANCIAL MARKET, DEBT RATIOS, FRAUD, MORAL HAZARD, MARK TO MARKET ACCOUNTING, CONTRACT DESIGNS, EXCHANGE COMMISSION, MORTGAGE, FINANCIAL MARKETS, EMERGING ECONOMIES, INSTITUTIONAL INVESTORS, HOLDING, DEPOSITS, CREDITORS, AUCTION, DIVERSIFIED PORTFOLIOS, CREDIT RATINGS, PROPERTY RIGHTS, OUTSTANDING AMOUNT, COMMERCIAL PAPER MARKET, MONETARY POLICY, GOVERNMENT GUARANTEE, LOAN MARKETS, INTEREST RATES, MORTGAGES, DEBT OBLIGATIONS, FINANCIAL RISK, SHORT-TERM BORROWINGS, AUTO LOANS, CONSUMER PROTECTION LEGISLATION, FINANCIAL SERVICE PROVIDERS, PROBABILITY OF DEFAULT, MARKET PRICES, HEDGE FUNDS, DEBT OUTSTANDING, DERIVATIVE INSTRUMENTS, PORTFOLIO, BANKRUPTCY, INVESTMENT ACTIVITIES, LENDERS, LEGAL SYSTEM, LENDER, PRINCIPAL PAYMENTS, MARKET PARTICIPANTS, DERIVATIVES, LIQUIDITY CRISES, CAPITAL MARKETS, HEDGE FUND, CREDITWORTHINESS, REGULATORY FRAMEWORK, FINANCIAL SYSTEM, LIABILITY, FINANCIAL INSTITUTIONS, INVESTMENT DECISIONS, FOREIGN CAPITAL, CURRENCY, HOME LOAN, NATURAL DISASTERS, CATASTROPHE BONDS, COMMERCIAL MORTGAGE, ASSET MANAGERS, INVESTOR LOSSES, DEBT SECURITIES, STOCK BROKERS, LOAN, NATURAL DISASTER, FINANCIAL DEVELOPMENT, DEVELOPING COUNTRIES, MATURITY, SECURITIES, LOAN TERMS, HOME MORTGAGE, CREDIT RATING, INVESTMENT STRATEGIES, GOVERNMENT REGULATION, MARKET FAILURES, LIEN, CREDIT QUALITY, INVESTMENT FUNDS, TRADING, LOCAL BANK, ILLIQUIDITY, LEGAL PROHIBITIONS, EMERGING ECONOMY, UNDERLYING MORTGAGES, OUTSTANDING LOANS, MARKET ECONOMY, TRANSACTION, CREDIT ENHANCEMENTS, TAX, CONSUMER BORROWERS, BANKING SYSTEM, INDIVIDUAL INVESTORS, INVENTORY, LOAN PERFORMANCE, STOCK MARKET, COMMERCIAL MORTGAGES, ECONOMIC GROWTH, GOVERNMENT GUARANTEES, MORTGAGE FINANCE, TRANSACTION COSTS, INTERNATIONAL SETTLEMENTS, DEBT OBLIGATION, RISK OF DEFAULT, DERIVATIVE MARKET, CREDIT DEFAULT SWAPS, BENEFICIARIES, BANK INVESTORS, INSTRUMENT, BAILOUT, BROKERS, FUTURES MARKET, FINANCIAL CRISIS, MARKET STABILITY, LONG-TERM CAPITAL, MARKET LIQUIDITY, CREDIT RATING AGENCIES, CONSUMER PROTECTION, DEPOSITORY INSTITUTIONS, SETTLEMENT, RISK MANAGEMENT, FORECLOSURE, COMMERCIAL PAPER, 330, TREASURY BONDS, BORROWER, LOAN APPLICATION, LONG TERM CAPITAL, INVESTMENT VEHICLES, MARK TO MARKET, DEFAULT RISK, TRANCHE, LOANABLE FUNDS, FINANCIAL DISTRESS, LINE OF CREDIT, FORECLOSURES, FUTURES, MARKET VALUE, DEBT INSTRUMENTS, DEFAULTS, CONSUMER LOANS, INTEREST RATE RISK, DEBT, MORTGAGE-BACKED SECURITIES, RISKY LOAN, ASYMMETRIC INFORMATION, DEFAULT RATE, DEFAULT PROBABILITIES, INVESTMENT PORTFOLIOS, MONETARY POLICIES, RETURN, COUPON, MARKET DISCIPLINE, LONG-TERM DEBT, LOAN DEMANDS, CAPITAL MARKET, SECURITIES INDUSTRY, REAL ESTATE COLLATERAL, RISK ASSESSMENTS, RISKY LOANS, REAL ESTATE LOANS, DEFICITS, FOREIGN EXCHANGE, BANK LENDERS, INVESTMENT POLICY, ACCOUNTING, LOAN DEFAULT, PORTFOLIOS, COMMERCIAL BANK, MARKET TRADING, CREDIT DEFAULT, VARIABLE RATE, ARBITRAGE, INTERNATIONAL DEVELOPMENT, BANKING REGULATIONS, PRUDENTIAL REGULATION, INSURANCE, MATURITY MISMATCHES, TRANSITION ECONOMIES, INVESTMENT STRATEGY, MORTGAGE BONDS, MORTGAGE LOANS, TREASURY, MATURITY MISMATCH, DIVERSIFIED INVESTORS, EXPENDITURES, COMMERCIAL BANKS, COMPETITIVE MARKET, INTERNATIONAL BANK, MONETARY AUTHORITY, HOMEOWNERSHIP, LOAN VOLUMES, CONTRACT DESIGN, INVESTMENT BANKS, FISCAL POLICIES, RISKY SECURITIES, INVESTMENT BANK, DERIVATIVE, ASSET CLASS, HOME MORTGAGES, INTEREST RATE, UNDERWRITERS, LOAN OFFICERS, ASSET-BACKED SECURITIES, DEFAULT RATES
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