Understanding the subprime martgage crisis
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Understanding the subprime martgage crisis
Understanding the Subprime Mortgage CrisisYuliya Demyanyk, Otto Van Hemert*This Draft: December 5, 2008 First Draft: October 9. 2007AbstractUsing loan Understanding the subprime martgage crisis n-level data, we analyze the quality of subprime mortgage loans by adjusting their performance for differences in borrower characteristics, loan characteristics, and macroeconomic conditions. We find that the quality of loans deteriorated for six consecutive years before the crisis and that securiti Understanding the subprime martgage crisis zers were, to some extent , aware of it. We provide evidence that the rise and fall of the subprime mortgage market follows a classic lending boom-busUnderstanding the subprime martgage crisis
t scenario, in which unsustainable growth leads to the collapse of the market. Problems could have been detected long before the crisis, but they wereUnderstanding the Subprime Mortgage CrisisYuliya Demyanyk, Otto Van Hemert*This Draft: December 5, 2008 First Draft: October 9. 2007AbstractUsing loan Understanding the subprime martgage crisis Box 442, St. Louis. MO 63166. Yuliya.DcmyanykQBtls.frb.org. Van Hcmcrt: Department of Finance. Stern School of Business, New York University, 44 W. 4th Street, New York. NY 10012, ovanhenusĩístera.nyn.edu. The authors would like to thank Cliff Asncss, Joest Driessen, William Emmons, Emre Ergungor, S Understanding the subprime martgage crisis cott Frame, Xavier Gabaix, Dwight Jaffee, Ralph Koijcn, Andreas Lehnert, Andrew Levent is, Chr is Mayer, Andrew Meyer, Toby Moskowitz, Lasse Pedersen,Understanding the subprime martgage crisis
Robert Rasche, Matt Richardson. Stefano Risa, Bent Sorensen, Matthew Spiegel. Stijn Van Nicuwerburgh, James Vickery, Jeff Wurglcr. anonymous refereesUnderstanding the Subprime Mortgage CrisisYuliya Demyanyk, Otto Van Hemert*This Draft: December 5, 2008 First Draft: October 9. 2007AbstractUsing loan Understanding the subprime martgage crisis York Fed Princeton liquidity conference; Lehman Brot hers; the Baruch-Columbia-Stcrn real estate conference; NYU Stern Research Day; C’apula Investment Management; AQR Capital Management,; the Conference on the Subprime Crisis and Economic Outlook in 20IIS at Lehman Brot hers; Freddie Mac; Federal D Understanding the subprime martgage crisis eposit and Insurance (Corporation (FDIC); U.S. Securities and Exchange Comission (SEC); Office of Federal Housing Enterprise Oversight (OFIIEO); BoardUnderstanding the subprime martgage crisis
of Governors of the Federal Reserve System; Carnegie Mellon University; Baruch; University of British Columbia, University of Amsterdam; the 11th AnnUnderstanding the Subprime Mortgage CrisisYuliya Demyanyk, Otto Van Hemert*This Draft: December 5, 2008 First Draft: October 9. 2007AbstractUsing loan Understanding the subprime martgage crisis olloquium on Derivatives, Risk-Return and Subprime, Lucca, Italy; and the Federal Reserve Bank of Cleveland; The views expressed arc those of the authors and do not necessarily reflect the official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.Electronic copy avail Understanding the subprime martgage crisis able at: httpA'ssm comfebstracb 10203961 IntroductionThe subprime mortgage crisis of 2007 was characterized by an unusually large fraction of subprimeUnderstanding the subprime martgage crisis
mortgages originated in 2006 and 2007 becoming delinquent or in foreclosure only months later. The crisis spurrod massive media attention; many diffeUnderstanding the Subprime Mortgage CrisisYuliya Demyanyk, Otto Van Hemert*This Draft: December 5, 2008 First Draft: October 9. 2007AbstractUsing loan Understanding the subprime martgage crisis auses of the crisis?’* To this end we use a loan-level database containing information on about half of all l.’.s. subprime mortgages originated between 2001 and 2007.The relatively poor performance of vintage 2006 and 2007 loans is illustrated in Figure 1 (left panel). At every mortgage loan age, l Understanding the subprime martgage crisis oans originated in 2006 and 2007 show a much higher delinquency rate than loans originated in earlier years at the same ages.Figure 1: Actual and AdjuUnderstanding the subprime martgage crisis
sted Delinquency RatoThe figure slwws the age pattern in the actual (left panel) and adjusted (right panel) delinquency rate for the different vintageUnderstanding the Subprime Mortgage CrisisYuliya Demyanyk, Otto Van Hemert*This Draft: December 5, 2008 First Draft: October 9. 2007AbstractUsing loan Understanding the subprime martgage crisis defaulted, at or before a given age. The adjusted delinquency rate is obtained by adjusting the actual rate for year-by-ycar variation in h’ico scores, loan to value ratios, debt to income ratios, mining debt-to-incomc ratio dummies, cash out refinancing dummies, owner occupation dummies, documentat Understanding the subprime martgage crisis ion levels, percentage of loans with prepayment penalties, mortgage rates, margins, composition of mortgage contract types, origination amount*, MSA hUnderstanding the subprime martgage crisis
ouse price appreciation since origination, change in state unemployment rate since origination, and neighborhood median income.Wc document that the poUnderstanding the Subprime Mortgage CrisisYuliya Demyanyk, Otto Van Hemert*This Draft: December 5, 2008 First Draft: October 9. 2007AbstractUsing loan Understanding the subprime martgage crisis brid, purchase-money,cash-out refinancing, low-documentation, and full-documentation loans originated in 2006 and 2007 all1E'Gctronic copy ava iablo I- *p /'ssm com/abstracb 1070396showed substantially higher delinquency rates than loans made the prior five years. This contradicts a widely held beli Understanding the subprime martgage crisis ef that the subprime mortgage crisis Wils mostly confined to hybrid or low-documentation mortgages.We explore to what extent the subprime mortgage criUnderstanding the subprime martgage crisis
sis can be attributed to different loan characteristics, borrower characteristics, macroeconomic conditions, and vintage (origination) year effects. TUnderstanding the Subprime Mortgage CrisisYuliya Demyanyk, Otto Van Hemert*This Draft: December 5, 2008 First Draft: October 9. 2007AbstractUsing loan Understanding the subprime martgage crisis ation and the time of loan performance evaluation. For the empirical analysis, we run a proportional odds duration model with the probability of (first-time) delinquency a function of these factors and Ioan age.We find that loan and borrower characteristics arc very important in terms of explaining Understanding the subprime martgage crisis the cross-section of loan performance. However, because these characteristics were not sufficiently different in 2006 and 2007 compared with the priorUnderstanding the subprime martgage crisis
five years, they cannot explain the unusually weak performance of vintage 2006 and 2007 loans. For example, a onc-standard-dcviation increase in the Understanding the Subprime Mortgage CrisisYuliya Demyanyk, Otto Van Hemert*This Draft: December 5, 2008 First Draft: October 9. 2007AbstractUsing loan Understanding the subprime martgage crisis ver, because the average dcbt-to-incomc ratio was just 0.2 standard deviations higher in 2006 than its level in previous years, it contributes very little to the inferior performance of vintage 2006 loans. The only variable in the considered proportional odds model that contributed substantially to Understanding the subprime martgage crisis the crisis is the low subsequent house price appreciation for vintage 2006 and 2007 loans, which can explain about a factor of 1.24 ami 1.39. respectiUnderstanding the subprime martgage crisis
vely, highcr-than-avcragc likelihood for a current loan to turn delinquent.1 Due to geographical heterogeneity in house price changes, some areas haveUnderstanding the Subprime Mortgage CrisisYuliya Demyanyk, Otto Van Hemert*This Draft: December 5, 2008 First Draft: October 9. 2007AbstractUsing loan Understanding the subprime martgage crisis ients of the vintage dummy variables, included as covariatcs in the proportional odds model, measure the quality of loans, adjusted for differences in observed loan characteristics, borrower characteristics, and macroeconomic circumstances. In Figure I (right panel) we plot the adjusted delinquency Understanding the subprime martgage crisis rates, which arc? obtained by using the estimated coefficients for the vintage' dummies and imposing the requirement that the average actual and averaUnderstanding the subprime martgage crisis
ge adjusted delinquency rates arc equal for any given age. As shown in Figure 1 (right panel), the adjusted delinquency rates have boon steadily risinUnderstanding the Subprime Mortgage CrisisYuliya Demyanyk, Otto Van Hemert*This Draft: December 5, 2008 First Draft: October 9. 2007AbstractUsing loan Understanding the subprime martgage crisis r (2001), and Bninncrmcicr and .billiard (2007).2 Also, house price appreciation may differ in cities versus rural areas. See for example Glaeser ami Gyourko (2005) and Gyourko and Sinai (2006).2nioởtronic copy ava table .It: 'r ‘p Ì SSTI oxnfaftstract:-1020396past seven years. Ill other words, loan Understanding the subprime martgage crisis quality adjusted for observed characteristics and macroeconomic circumstances deteriorated monotonically between 2001 and 2007. Interestingly, 2001 wUnderstanding the subprime martgage crisis
as among the worst, vintage years in terms of actual delinquency rates, but is in fact the best vintage year in terms of the adjusted rates. High inteUnderstanding the Subprime Mortgage CrisisYuliya Demyanyk, Otto Van Hemert*This Draft: December 5, 2008 First Draft: October 9. 2007AbstractUsing loan Understanding the subprime martgage crisis ncy rate; after adjusting for these unfavorable circumstances, however, the adjusted delinquency rates arc low.In addition to the monotonic deterioration of loan quality, we show that over time the average combined loan-to-value ratio increased, the fraction of low documentation loans increased, and Understanding the subprime martgage crisis the subprime-prime rate spread decreased. The rapid rise and subsequent fall of the subprime mortgage market is therefore reminiscent of a classic leUnderstanding the subprime martgage crisis
nding booin-bust scenario.3 4 The origin of the subprime lending boom has often been attributed to the increased demand for so-called private-label moGọi ngay
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