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The subprime mortgage has been the most attractive service for a consumer because real estate purchase mortgage loan is provided despite negative indices characterizing the borrower. The share of such borrowers on the Russian market makes up about 70 %. If Russian banks began to provide subprime mortgages today, it would immediately liven real estate market, and consequently other goods and service markets. However, anyway there would come the moment when the “soap bubble” burst, that is to say that borrowers would not be able to cope with the increased interest rate and that would result into mass non-payments and bankruptcies. It is necessary to analyse all positive and negative sides and to offer the market the model and mechanisms with the help of which the lessons of the 2008—2009 economic crisis would be taken into account. Subprime mortgage loan, as well as any other one, is divided into two assets: initial payment and principal amount of a loan. First lesson: it is necessary to separate these two assets and not to link them in one. Using the possibilities of a microfinance loan (credit), it is necessary to provide borrowers with the sum of the initial payment so that they match standard terms of lending. Second lesson: it is not allowed to register borrower’s apartment if the whole sum of the loan isn't paid out, it must be registered in the name of the builder or his sales agent. Firstly, it will inspire the borrower to force advance payments for a mortgage loan. Secondly, and it results from possible legal judgments on confiscation of the real estate registered in payment for another loan, that subsequently can lead to the loss of the rights to the apartment. The third lesson is the question: when is the niche for this kind of business is formed? A businessman has to consider all factors, work out or follow the mechanisms recommended by economists in order to “replace” the government and at the same time abide by the laws. On the other hand, the government must welcome and stimulate these initiatives because, in fact, commercial structures will solve one of its constitutional duties / Субстандартная ипотека остает-ся наиболее привлекательной услугой для потребителя ввиду того, что ипотечный кредит на покупку жилой недвижимости выдается несмотря на отрицательные характеристики заемщика. Доля таких заемщиков на российском рынке около 70 %. И если сегодня российские банки начали бы выдавать субстандартные ипотечные кредиты, то это немедленно оживило бы рынок недвижимости, а следом за ним и другие рынки товаров и услуг. Однако все равно наступил бы момент, когда «мыльный пузырь» лопнул, а именно: заемщики не смогли бы справиться с повышенной процентной ставкой, что привело бы к массовым неплатежам и банкротствам. Необходимо проанализировать все положительные и отрицательные стороны и предложить рынку модели и механизмы, при которых были бы учтены уроки экономического кризиса 2008—2009 гг. Субстандартная ипотека, как и любая другая, делится на два актива: первоначальный взнос и основная сумма кредита. Первый урок: нужно делить эти два актива и не увязывать их между собой в один. Используя возможности микрофинансового займа (кредита), финансировать заемщиков на сумму первоначального взноса, приводя их к стандартным условиям кредитования. Второй урок: нельзя регистрировать квартиру на заемщика, пока не выплачена вся сумма кредита, она должна быть зарегистрирована на застройщика или его агенте по продаже. Во-первых, это будет стимулиро-вать заемщика форсировать досрочными выплатами расчеты по ипотечному кредиту. Во вторых, и это вытекает из возможных судебных решений по конфискации зарегистрированной в собственность жилой недвижимости в счет обеспечения другого долга, в последующем это может привести к потере прав на квартиру. Третий урок — это вопрос: когда образуется ниша для бизнеса в этом виде услуг? Предприниматель должен учесть все факторы, разработать или следовать механизмам, рекомендованным экономистами, чтобы «заместить» государство, при этом следовать его законам. С другой стороны, государство должно приветствовать и стимулировать данные инициативы, так как, по сути, коммерческие структуры будут решать одну из его консти-туционных обязанностей

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood-level data on racial and ethnic characteristics for metropolitan areas in California and Florida. Using a model of rate determination that accounts for predicted loan performance, we evaluate the differences in subprime mortgage rates in terms of racial and ethnic groups and neighborhood characteristics. We find evidence of adverse pricing for Blacks and Hispanics. The evidence of adverse pricing is strongest for purchase mortgages and mortgages originated by non-depository institutions.

Concentrated poverty has been said to impose a double burden on those that confront it. In addition to an individual's own financial constraints, institutions and social networks of poor neighborhoods can further limit access to quality services and resources for those that live there. This study contributes to the characterization of subprime lending in poor neighborhoods by including a spatial dimension to the analysis, in an attempt to capture social – endogenous and exogenous interaction – effects differences in poor and less poor neighborhoods. The analysis is applied to 2004–2006 census tract level data in Cuyahoga County, home to Cleveland, OH, a region that features urban neighborhoods highly segregated by income and race. The patterns found in poor neighborhoods suggest stronger social effects inducing subprime lending in comparison to less poor neighborhoods.

This paper explores the link between the house-price expectations of mortgage lenders and the extent of subprime lending. It argues that bubble conditions in the housing market are likely to spur subprime lending, with favorable price expectations easing the default concerns of lenders and thus increasing their willingness to extend loans to risky borrowers. Since the demand created by subprime lending feeds back onto house prices, such lending also helps to fuel an emerging housing bubble. These ideas are illustrated in a theoretical model, and tentative support is found in empirical work exploring the connection between price expectations and the extent of subprime lending. † The views expressed in this paper are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia, the Federal Reserve Board of Governors, or the Federal Reserve System. This paper is available free of charge at http://www.philadelphiafed.org/ research-and-data/publications/working-papers./

The long-horizon event study methodology is used to document the severe impact of the US subprime mortgage crisis on the Colombian economy. The estimated parameter of a constantmean return model is used to derive the “abnormal return” on the market portfolios of Colombia over its selected event window. Analyses of the results reveal that the US subprime mortgage crisis negatively affected both the Colombian and the US equity markets almost identically in terms of cumulative percentage reductions and timing. Statistic testing results seem to support the qualitative observation. This phenomenon can be attributable to the recent multilateral and regional trade agreements that increase the flow of trade and foreign direct investment to Colombia. Resumen El estudio metodológico de horizonte largo es usado para documentar el impacto severo de la crisis de la finca raíz de Estados Unidos en la Economía Colombiana. El parámetro estimado de la constante del retorno del modelo es usado para derivar el retorno anormal en el mercado de portafolios sobre su selección de la ventana de evento. Análisis de estos resultados revelan que la crisis de la finca raíz en Estados Unidos afectó negativamente ambos mercados de acciones en Estados Unidos y Colombia casi idénticamente en términos de reducción de porcentaje cumulativo y tiempo. Resultados de pruebas estadísticas parecen soportar la observación. Este fenómeno puede ser atribuido a los recientes acuerdos de comercio multilaterales y regionales que incrementan el flujo de comercio e inversión extranjera directa a Colombia.

We compare the twelve-month default probability among subprime borrowers differing only in the number of months before their first lump-sum property tax payment, after which time they may be exposed to reduced liquidity. We show that borrowers with an earlier property tax bill—within three months of origination—have 2% to 6% higher first-year default rates than borrowers facing their first property tax bill ten to twelve months after origination. Lump-sum property tax payments appear to produce a persistent state of low liquidity, the length of which raises the likelihood of default. These results are about one-third the effect size of a transition from 10% positive to 20% negative equity found in the literature. This paper provides causal evidence that liquidity constraints are important predictors of mortgage default.

On close inspection many of the most popular explanations for the subprime crisis turn out to be myths. Empirical research shows that the causes of the subprime mortgage crisis and its magnitude were more complicated than mortgage interest rate resets, declining underwriting standards, or declining home values. Nor were its causes unlike other crises of the past. The subprime crisis was building for years before showing any signs and was fed by lending, securitization, leveraging, and housing booms.

A central question in the literature on mortgage default is at what point underwater homeowners walk away from their homes even if they can afford to pay. We study borrowers from Arizona, California, Florida, and Nevada who purchased homes in 2006 using non-prime mortgages with 100 percent financing. Almost 80 percent of these borrowers default[ed] by the end of the observation period in September 2009. After distinguishing between defaults induced by job losses and other income shocks from those induced purely by negative equity, we find that the median borrower does not strategically default until equity falls to -62 percent of their home's value. This result suggests that borrowers face high default and transaction costs. Our estimates show that about 80 percent of defaults in our sample are the result of income shocks combined with negative equity. However, when equity falls below -50 percent, half of the defaults are driven purely by negative equity. Therefore, our findings lend support to both the 'double-trigger' theory of default and the view that mortgage borrowers exercise the implicit put option when it is in their interest.

What began as a downturn in the U.S. housing sector in mid-2007 soon mushroomed into a global financial crisis by September 2008. Why was the crisis triggered in the United States renowned for its resilient and innovative economic system? Why the crisis, which began with the implosion of a relatively small part of the U.S. housing market (the subprime mortgages) quickly morphed into a credit crunch, plunging the world economy in the worst financial crisis since the Great Depression? And, what explains the failure of both the market participants and public authorities to anticipate (at least initially) the depth and gravity of the crisis? In contrast to conventional explanations that see the crisis rooted in the procyclicality of the financial system, or the result of Wall Street greed and incompetence, this article provides a political-economy analysis of the complex series of events that lead to U.S. subprime meltdown. Specifically, the paper illustrates that the subprime crisis is fundamentally the result of massive regulatory failure in the United States. Although both market actors and regulators failed to properly assess the risks of complex assets, powerful lawmakers (both Republicans and Democrats) and regulators whose responsibility was to maintain due diligence against potentially destructive market failure, clearly failed in their responsibility.

The purpose of this study is two-fold: first, to explain the demise of subprime and Alt-A mortgage markets in the U.S. from the viewpoint of measuring and managing mortgage credit risk; and secondly, to discuss several policy lessons that can be learned from the market meltdown. To that end, three tiers of mortgage credit models are elaborated, including the scoring (or risk rank-ordering), risk-based pricing, and ¡§sizing¡¨ (or the analytics used in determining subordination levels of credit-sensitive mortgage backed security (MBS) deals) models. Using these as conceptual underpinning, empirical evidence is surveyed to document key contributing factors to the market demise. Those that are identified include the non-availability of reliable mortgage performance data, lack of theory as well as industry best-practices in performing simulation-based mortgage risk assessments, complex and arcane structures of mortgage backed securities, and information asymmetry among the parties involved in the security transactions. The overall conclusion derived is that the participants to these market segments surpass their risk management capabilities in globalizing funding for subprime and Alt-A mortgages. The policy lessons emphasized are the importance of the infrastructure of proper risk assessment and risk-based pricing, as well as prudent and transparent MBS products along with periodic information disclosure.

We explore the types of data used to characterize risky subprime lending and consider the geographic dispersion of subprime lending. First, we describe the strengths and weaknesses of three different datasets on subprime mortgages using information from LoanPerformance, HUD, and HMDA. These datasets embody different definitions of subprime mortgages. We show that estimates of the number of subprime originations are somewhat sensitive to which types of mortgages are categorized as subprime. Second, we describe what parts of the country and what sorts of neighborhoods had more subprime originations in 2005, and how these patterns differed for purchase and refinance mortgages. Subprime originations appear to be heavily concentrated in fast-growing parts of the country with considerable new construction, such as Florida, California, Nevada, and the Washington DC area. These locations saw house prices rise at faster-than-average rates relative to their own history and relative to the rest of the country. However, this link between construction, house prices, and subprime lending is not universal, as other markets with high house price growth such as the Northeast did not see especially high rates of subprime usage. Subprime loans were also heavily concentrated in Zip codes with more residents in the moderate credit score category and more black and Hispanic residents. Areas with lower income and higher unemployment had more subprime lending, but these associations are smaller in magnitude.

In this brief, we provide an overview of patterns of subprime lending, as well as trends in foreclosures and REOs, in suburban communities compared to inner-cities. We also explore the relationship between foreclosures in suburban areas and the increased suburbanization of poverty. We find that the vast majority of foreclosures –nearly three out of four (73.1 percent)—have been in suburban areas, and that suburban neighborhoods with higher rates of poverty are more likely to experience higher foreclosure rates. This is of concern because the mechanisms for addressing the challenges associated with concentrated foreclosures can be more difficult to implement in suburban areas; suburbs may have smaller local governments, fewer nonprofits, and a more dispersed urban form, making it difficult for cities or nonprofits to administer programs or for residents to access them. Because the distribution of foreclosed homes has significant implications for the long-term stability of suburban neighborhoods, increased resources and attention should be devoted to developing foreclosure responses that take into account the capacity and access challenges that are unique to suburban neighborhoods.

No. In this paper we use a regression discontinuity approach to investigate whether affordable housing policies influenced origination or affected prices of subprime mortgages. We use merged loan-level data on non-prime securitized mortgages with individual- and neighborhood-level data for California and Florida. We find no evidence that lenders increased subprime originations or altered pricing around the discrete eligibility cutoffs for the Government Sponsored Enterprises (GSEs) affordable housing goals or the Community Reinvestment Act. Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by the GSEs were not due to affordable housing mandates.

En el presente artículo se detallan algunos de los fallos del sistema que han sido aprovechados por parte de los máximos responsables del orden mundial para proseguir de manera irresponsable e inconsciente con sus ambiciosos objetivos de riqueza y poder, sin atender a las posibles consecuencias de las que ya muchos expertos habían avisado sin ser escuchados. La crisis financiera y económica global en la que nos encontramos en la actualidad ha sido originada por una serie de diversos factores y situaciones que quedan lejos del conocimiento y del alcance de las personas normales. Hay un aspecto que destaca entre todos esos factores: las acciones irregulares e incluso negligentes de personas que ocupan altos cargos en grandes empresas, en el sistema bancario y también en la política. Las consecuencias de tales actos ya son conocidas por todos y las repercusiones finales corren a cuenta de los ciudadanos de a pie, que aguantan resignados toda clase de injusticias y abusos por parte de los mandatarios, quienes, amparados en una Ley muy favorable a sus intereses, no dudan en exprimir al máximo la paciencia y la vida de sus propios paisanos. Actualmente estamos viviendo un momento de máxima tensión en nuestro país. La prima de riesgo alcanza cotas de récord histórico, el cuarto banco más importante de España, Bankia, está al borde del abismo, mientras el Gobierno, que sigue repercutiendo todas las consecuencias hacia las personas, pretende salvar dicha entidad bancaria inyectando miles de millones de Euros salidos de las arcas públicas. Por su parte, la Unión Europea no hace más que ejercer presión para que los ciudadanos "nos apretemos el cinturón" sin darse cuenta de que prácticamente nos están cortando la circulación sanguínea a la altura de la cintura. ¿Hasta cuándo durará esto? ¿Reaccionará el pueblo o seguirá aguantando esta situación opresiva y abusiva? This article details some of the system failures that have been exploited by the heads of the world order to continue with their ambitious targets of power and richness in an irresponsible and unconscious way, not considering the possible consequences which many experts had already warned about. The financial and economic global crisis in which we are currently has been originated by some diverse factors and situations that are far from people�s knowledge. There's one aspect that stands out among all those factors: the irregular and negligent actions made by bank managers, by important businessmen and by political leaders. The consequences of such acts are known by everyone and the repercussions are taken by the resigned citizens, who endure all kinds of injustices and abuses committed by those leaders, which are protected by a very favorable Law and which don't hesitate to exploit to the maximum the lifes of their own compatriots. We are now living some pretty tense moments in our country. The risk premium has reached a historical record, the fourth largest bank in Spain, Bankia, is on the brink of ruin, while the Government is intending to save that entity with public money. Meanwhile, the European Union does nothing but pressurize us into tightening our belts, not realizing that they're cutting us off the circulation in our waists. Until when is this situation going to last? Will we react or will we keep enduring this aggressive and abusive situation?

En el presente artículo se detallan algunos de los fallos del sistema que han sido aprovechados por parte de los máximos responsables del orden mundial para proseguir de manera irresponsable e inconsciente con sus ambiciosos objetivos de riqueza y poder, sin atender a las posibles consecuencias de las que ya muchos expertos habían avisado sin ser escuchados. La crisis financiera y económica global en la que nos encontramos en la actualidad ha sido originada por una serie de diversos factores y situaciones que quedan lejos del conocimiento y del alcance de las personas normales. Hay un aspecto que destaca entre todos esos factores: las acciones irregulares e incluso negligentes de personas que ocupan altos cargos en grandes empresas, en el sistema bancario y también en la política. Las consecuencias de tales actos ya son conocidas por todos y las repercusiones finales corren a cuenta de los ciudadanos de a pie, que aguantan resignados toda clase de injusticias y abusos por parte de los mandatarios, quienes, amparados en una Ley muy favorable a sus intereses, no dudan en exprimir al máximo la paciencia y la vida de sus propios paisanos. Actualmente estamos viviendo un momento de máxima tensión en nuestro país. La prima de riesgo alcanza cotas de récord histórico, el cuarto banco más importante de España, Bankia, está al borde del abismo, mientras el Gobierno, que sigue repercutiendo todas las consecuencias hacia las personas, pretende salvar dicha entidad bancaria inyectando miles de millones de Euros salidos de las arcas públicas. Por su parte, la Unión Europea no hace más que ejercer presión para que los ciudadanos "nos apretemos el cinturón" sin darse cuenta de que prácticamente nos están cortando la circulación sanguínea a la altura de la cintura. ¿Hasta cuándo durará esto? ¿Reaccionará el pueblo o seguirá aguantando esta situación opresiva y abusiva?, This article details some of the system failures that have been exploited by the heads of the world order to continue with their ambitious targets of power and richness in an irresponsible and unconscious way, not considering the possible consequences which many experts had already warned about. The financial and economic global crisis in which we are currently has been originated by some diverse factors and situations that are far from people�s knowledge. There's one aspect that stands out among all those factors: the irregular and negligent actions made by bank managers, by important businessmen and by political leaders. The consequences of such acts are known by everyone and the repercussions are taken by the resigned citizens, who endure all kinds of injustices and abuses committed by those leaders, which are protected by a very favorable Law and which don't hesitate to exploit to the maximum the lifes of their own compatriots. We are now living some pretty tense moments in our country. The risk premium has reached a historical record, the fourth largest bank in Spain, Bankia, is on the brink of ruin, while the Government is intending to save that entity with public money. Meanwhile, the European Union does nothing but pressurize us into tightening our belts, not realizing that they're cutting us off the circulation in our waists. Until when is this situation going to last? Will we react or will we keep enduring this aggressive and abusive situation?

Although similar in many ways, subprime hybrids were really different from prime hybrids.

This article presents arguments and evidence suggesting that the bankruptcy abuse reform (BAR) of 2005 may have been one contributor to the destabilizing surge in subprime foreclosures. Before BAR took effect, overly indebted borrowers could file bankruptcy to free up income to pay their mortgage by having their credit card and other unsecured debts discharged. BAR eliminated that option for better-off filers through a means test and other requirements, thus making it harder to save one’s home by filing bankruptcy. By way of evidence, the authors show that the impact of BAR was greater in U.S. states where one would expect it to have a larger impact — namely, in states with high bankruptcy exemptions. Filers in low-exemption states were not very protected before BAR, so they were less likely to be affected by the reform. The authors estimate that for a state with an average home equity exemption, the subprime foreclosure rate after BAR rose 11 percent relative to average before the reform; given the number of subprime mortgages in the United States, that figure translates into 29,000 additional subprime foreclosures per quarter nationwide attributable to BAR.

The economic history of the United States is riddled with financial crises and banking panics. During the nineteenth-century, eight major such episodes occurred. In the period following World War II, some believed that these crises would no longer happen, and that the U.S. had reached a time of everlasting financial stability and sustainable growth. The Savings and Loans Crisis of the 1980s, the 2001 dot-com bust and the 2007 housing bubble that led to the current global financial crises demonstrate that these phenomena are still reoccurring. Regulators and policy makers should keep aware of the recurrence of such crises.

Most US house price models break down in the mid-2000's, due to the omission of exogenous changes in mortgage credit supply (associated with the sub-prime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time home-buyers. Incorporating a measure of credit conditions - the cyclically adjusted loan-to-value ratio for first time buyers – into house price to rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.

The U.S. house price boom has been linked to an unsustainable easing of mortgage credit standards. However, standard time series models of U.S. house prices omit credit constraints and perform poorly in the 2000s. We incorporate data on credit constraints for first-time buyers into a model of U.S. house prices based on the (inverted) demand for housing services. The model yields not only a stable long-run cointegrating relationship, a reasonable speed of adjustment, plausible income and price elasticities and an improved fit, but also sensible estimates of tax credit effects and the possible bottom in real house prices.

A growing literature suggests that housing policy, embodied by the Community Reinvestment Act (CRA) and the affordable housing goals of the government sponsored enterprises, may have caused the subprime crisis. The conclusions drawn in this literature, for the most part, have been based on associations between aggregated national trends. In this paper we examine more directly whether these programs were associated with worse outcomes in the mortgage market, including delinquency rates and measures of loan quality. We rely on two empirical approaches. In the first approach, which focuses on the CRA, we conjecture that historical legacies create significant variations in the lenders that serve otherwise comparable neighborhoods. Because not all lenders are subject to the CRA, this creates a quasi-natural experiment of the CRA's effect. We test this conjecture by examining whether neighborhoods that have been disproportionally served by CRA-covered institutions historically experienced worse outcomes. The second approach takes advantage of the fact that both the CRA and GSE goals rely on clearly defined geographic areas to determine which loans are favored by the regulations. Using a regression discontinuity approach, our tests compare the marginal areas just above and below the thresholds that define eligibility, where any effect of the CRA or GSE goals should be clearest. We find little evidence that either the CRA or the GSE goals played a significant role in the subprime crisis. Our lender tests indicate that areas disproportionately served by lenders covered by the CRA experienced lower delinquency rates and less risky lending. Similarly, the threshold tests show no evidence that either program had a significantly negative effect on outcomes.

In this paper we conduct an empirical investigation of how neighborhood mortgage adoption contagion affects mortgage product choice, with an emphasis on Hispanic borrowers. We use loan-level mortgage data for metropolitan areas in California and Florida during 2004 and 2005, the peak years of the subprime mortgage boom. We identify an important and statistically significant effect of contagion on consumer choice of hybrid mortgage products that were popular during this period, especially for Hispanic borrowers.

The future of housing finance is in a state of flux. In February 2011, the Obama Administration released a proposal outlining three plans for the future of housing finance. In all three plans, Freddie Mac and Fannie Mae will be phased out over a period of years and replaced with a private securitization market, which may be backed, in whole or in part, by a government guarantee. Whether the final plan relies upon government-guaranteed securities or private-label securities, Congress will have to resolve a range of complex legal aspects of securitization, from the bankruptcy remoteness of pools of securities to setting national standards for loans and financing. One issue that does not appear to be getting much attention is the potential liability of the parties to a securitization for the unlawful actions of loan originators. In this paper, the authors take the position that any new housing finance system must clarify the liability of participants in the securitization pipeline so that the market can more accurately price securities up front and create incentives for more effective compliance programs to stop problem loans from entering the pipeline.

The examination of U.S. crises reveals that the current financial crisis follows past patterns. An investment bubble creates excess demand for new financing instruments. During the railroad bubbles of the nineteenth century loans were issued at a pace higher than many companies could pay back. The current housing bubble originated from issuing sub-prime mortgages that assume that housing prices would only rise. The increased demand for credit induces financial innovations and instruments that circumvent existing regulations. Inevitably, the bubble bursts. The history of financial crises teaches that policy reforms and new regulations cannot prevent future financial crises.

Durante los últimos años, los bancos de inversión de Estados Unidos, Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs y Morgan Stanley, habían logrado alcanzar beneficios inimaginables que superaron con creces a los obtenidos por los bancos comerciales tradicionales. Sin embargo, la crisis financiera de 2008 ha logrado derrumbar todo un modelo bancario surgido como consecuencia de la Gran Depresión del 29; esas instituciones financieras fueron creadas para inyectar liquidez al mercado hipotecario y proteger a los pequeños inversionistas. Con base en la revisión documental de fuentes secundarias, este trabajo describe la caída del modelo de inversión de los Estados Unidos tomando como punto de partida el origen y evolución de la crisis financiera de 2008. De lo anterior se evidencia la falta de confianza y credibilidad en el sistema financiero actual de los Estados Unidos. During the last years, investment banks in the United States, Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley, had reached unimaginable benefits that exceeded those of traditional commercial banks. However, the financial crisis of 2008 has collapsed a banking model emerged as a result of the Great Depression of 29; those financial institutions were created to inject liquidity to the mortgage market and to protect small investors. Based on the review of secondary sources, this paper describes the fall of the investment model of the United States since the origin and evolution of the financial crisis of 2008. It demonstrates the lack of trust and credibility in the current financial system of the United States. 28-37 marellano@mail.luz.ve

How did investors holding assets backed by subprime residential mortgages react when Treasury Secretary Paulson announced the so-called "teaser freezer" plan to modify mortgages in December 2007? We apply event-study methodology to the ABX index, the only source of daily securities prices in subprime mortgage markets. Our results show that investors initially perceived that the Paulson Plan would improve conditions in subprime housing markets. Specifically, those investors who held the riskiest securities backed by subprime residential housing benefited the most from the Paulson Plan. These findings do not extend to the longer term, suggesting that any positive effects from Paulson Plan loan modifications were overwhelmed by the continued deterioration in housing markets. ; WP 10-06 replaces an earlier version listed as WP 09-7

The boom in the subprime mortgage market yielded many loans with high LTV ratios. From a large proprietary database on subprime mortgages, we find that choice of mortgage rate type is not linear in loan sizes. A fixed rate mortgage contract is a popular choice when loan size, measured by LTV ratio, is small. As LTV ratio increases, borrowers become more likely to choose adjustable rate mortgage contracts. However, when LTV reaches a certain level, borrowers start to switch back to fixed rate contracts. For these high LTV loans, fixed rate mortgages dominate borrowers' choices. We present a very simple model that explains this 'nonlinear' pattern in mortgage instrument choice. The model shows that the choice of mortgage rate type depends on two opposing effects: a 'term structure' effect and an 'interest rate volatility' effect. When the loan size is small, the term structure effect dominates: rising LTV ratios making ARM loans less costly, and more attractive. However, when the loan size is large enough, the interest volatility effect dominates: rising LTV ratios making FRM loans less costly and preferable. We present strong empirical evidence in support of the model predictions.

Subprime mortgage lending expanded in New York City between 2004 and mid-2007, and delinquencies on these subprime loans have been rising sharply. We use a rich, loan-level data set of the city's outstanding subprime loans as of January 2009 to describe the main features of this lending and to model the performance of these loans. These subprime loans represent a smaller share of total housing units in the city than is true nationwide. In addition, they are found to be clustered in neighborhoods where average borrower credit quality is low and, unlike prime mortgage loans, where African-Americans and Hispanics constitute relatively large shares of the population. We estimate a model of the likelihood that these loans will become seriously delinquent and find a significant role for credit quality of borrowers, debt-to-income and loan-to-value ratios at the time of loan origination, and estimates of the loss of home equity.

The exact cause of the massive defaults and foreclosures in the U.S. subprime mortgage market is still unclear. This paper investigates whether a particular aspect of borrowers' financial literacy - their numerical ability - may have played a role. We measure several aspects of financial literacy and cognitive ability in a survey of subprime mortgage borrowers who took out mortgages in 2006 or 2007 and match these measures to objective data on mortgage characteristics and repayment performance. We find a large and statistically significant negative correlation between numerical ability and various measures of delinquency and default. Foreclosure starts are approximately two-thirds lower in the group with the highest measured level of numerical ability compared with the group with the lowest measured level. The result is robust to controlling for a broad set of sociodemographic variables and not driven by other aspects of cognitive ability or the characteristics of the mortgage contracts. Our results raise the possibility that limitations in certain aspects of financial literacy played an important role in the subprime mortgage crisis.

We study credit ratings on subprime and Alt-A mortgage-backed-securities (MBS) deals issued between 2001 and 2007, the period leading up to the subprime crisis. The fraction of highly rated securities in each deal is decreasing in mortgage credit risk (measured either ex ante or ex post), suggesting that ratings contain useful information for investors. However, we also find evidence of significant time variation in risk-adjusted credit ratings, including a progressive decline in standards around the MBS market peak between the start of 2005 and mid-2007. Conditional on initial ratings, we observe underperformance (high mortgage defaults and losses and large rating downgrades) among deals with observably higher risk mortgages based on a simple ex ante model and deals with a high fraction of opaque low-documentation loans. These findings hold over the entire sample period, not just for deal cohorts most affected by the crisis.

Related links: http://www.richmondfed.org/publications/research/region_focus/2010/q4/federal_reserve_weblinks.cfm

Over the past decade, the United States has seen real estate activity swing from boom to bust. But upstate New York has been largely insulated from this volatility, with metropolitan areas such as Buffalo, Rochester, and Syracuse even registering home price increases during the recession. An analysis of upstate housing markets over the most recent residential real estate cycle indicates that the region's relatively low incidence of nonprime mortgages and the better-than-average performance of these loans contributed to this stability.

This study presents a brief overview of the Alt-A mortgage market with the goal of outlining broad trends in the different borrower and mortgage characteristics of Alt-A market originations between 2000 and 2006. The paper also documents the default patterns of Alt-A mortgages in terms of the various borrower and mortgage characteristics over this period. (JEL G1, G21)

Hybrid adjustable rate mortgages (HARM) were designed to be refinanced by the reset date, when the interest rate would jump. These mortgages worked out well for many people who were credit risks - but only as long as housing prices continued to rise.

Today there is a frequent refrain that the subprime collapse came as a surprise. We contend that, on the contrary, many saw it coming. Starting in the 1990s, there were white papers by consumer organizations and articles in newspapers about abuses in the subprime market. Consumer advocates repeatedly testified before House and Senate committees, citing evidence that, for example, home foreclosures had tripled between 1982 and 1997, high-cost subprime loans accounted for 22 percent of all foreclosures in 1998, and many subprime loans were simply unaffordable.

We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment-reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securitization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small, and for subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors.

The world economy currently suffers from a global financial and economic crisis that has become severe since the second half of 2008. This global financial situation was triggered by the advent of the subprime mortgage crisis in the United States that became apparent from the mid-2007s. Europe was the next affected, thereafter its contagion spread to the rest of the world. East Asia did not escape. The nature of the current global financial crisis is unprecedented in terms of (1) the scale of the problems in the financial sector (particularly in the United States and Europe), (2) the depth and speed of contagion worldwide (through financial sector and trade linkages), and (3) the severity of the recession (particularly in emerging market economics, small countries, and East Asia). This paper analyzes, mainly, cross-border capital movements by looking at the pre-crisis features of the United States as the crisis hypocenter and its relationships with other countries. Detailed observations are conducted with respect to cross-border investment in stocks and debt securities, as well as banking activities. The paper then sheds light on the impact of the subprime mortgage crisis on cross-border capital movements in the United States, the United Kingdom, and East Asia. Other performance indicators such as exchange rates, economic growth and international trade are also discussed in the case of East Asia. The paper examines several challenges the recent crisis poses for East Asia.

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 a re surprisingly similar: about 20, 50, and 80 percent, respectively, at one, two, and three years after origination. For loans originated when house prices appreciated the most, terminations were dominated by prepayments. For loans originated when the housing market slowed, defaults dominated. The similarity of the loan termination rates for all vintages in the sample suggests that subprime mortgage loans were intended to be “bridge” (i.e., temporary) loans. In addit ion, between 2001 and 2006, the number of terminated subprime purchase-money loans (loans used to purchase rather than refinance a house) outweighed the estimated number of first-time-homebuyers with subprime mortgages. The effect of the subprime lending on the increase of homeownership in the United States—a potentially positive outcome of subprime mortgages—most likely has b een overstated. (JEL D12, G1, G21)

Mortgage modifications have become an important component of public interventions designed to reduce foreclosures. In this paper, we examine how the structure of a mortgage modification affects the likelihood of the modified mortgage re-defaulting over the next year. Using data on subprime modifications that precede the government's Home Affordable Modification Program, we focus our attention on those modifications in which the borrower was seriously delinquent and the monthly payment was reduced as part of the modification. The data indicate that the re-default rate declines with the magnitude of the reduction in the monthly payment, but also that the re-default rate declines relatively more when the payment reduction is achieved through principal forgiveness as opposed to lower interest rates.