The Nonprime Mortgage Crisis and Positive Feedback Lending
Year: 2018
Type: article
Abstract: The “great recession” of 2007–2009 was sparked by a bubble in U.S. housing prices, driven in turn by a bubble in nonprime mortgage lending. We collect evidence that the risk of a nonprime housing bubble (not the certainty, but a meaningful risk) should have been obvious to the main participants in the markets for nonprime lending and related mortgage-backed securities (nonprime MBS), including originators, securitizers, rating agencies, money managers, and institutional investors. Those who did not see the risk were, in many cases, willfully blind. We also discuss the strong positive feedback nature of typical nonprime mortgages. This positive feedback made it highly likely that, if nonprime housing prices flattened, let alone fell, they would soon crash and take many nonprime MBS with them. We discuss regulatory responses that might limit positive feedback lending, cause the next bubble to be smaller and less likely, and make the post-bubble aftermath less painful.
DOI: 10.1561/108.00000019
Institutions: Northwestern University, Cornell University
Language: English
Topic: Housing Market and Economics
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2805779779