David Milleker: The rise and fall of the U.S. subprime mortgage market

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The rise and fall of the U.S. subprime mortgage market

16 pp.
3.10 EUR
(March 2009)

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The author analyses the impact of the sub-prime mortgage segment on the overall mortgage market within the empirical framework of an endogenous money-supply model. Consistent with the theory of financial crises as put forward by Charles Kindleberger, he finds that the opening of a new credit channel in the form of sub-prime mortgages initially sent the banks a signal of reduced risks by allowing Ponzi schemers into the market which depressed delinquency rates. The Ponzi schemers stayed in the market for as long as the mortgage rate was lower than a) the growth rate of house price appreciation and b) the growth rate of income. Once both conditions were not met any longer, delinquencies started to rise. In addition, Milleker finds that commercial banks tried to hedge potential risks by shifting the emphasis to adjustable rather than fixed rate mortgages. This, however, came at the cost of higher delinquencies down the line.

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