Understanding the Subprime Mortgage Crisis-Demyanyk&Hemert

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Understanding the Subprime Mortgage


Yuliya Demyanyk

Federal Reserve Bank of Cleveland

Otto Van Hemert

Stern School of Business, New York University

The subprime mortgage crisis that started in 2007 was characterized by an

unusually large fraction of subprime mortgages originated in 2006 and 2007

becoming delinquent or in foreclosure only months later. The crisis spurred

massive media attention; many different explanations of the crisis have been

proffered. The goal of this paper is to answer the question: “What do the data

tell us about the possible causes of the crisis?” To this end we use a loan-level

database containing information on about half of all subprime mortgages in the

United States that originated between 2001 and 2007.

The authors would like to thank the executive editor Matthew Spiegel and the anonymous referee for valuable suggestions, as well as Cliff Asness, Joost Driessen, William Emmons, Emre Ergungor, Scott Frame,

Xavier Gabaix, Dwight Jaffee, Ralph Koijen, Andreas Lehnert, Andrew Leventis, Chris Mayer, Andrew Meyer,

Toby Moskowitz, Lasse Pedersen, Robert Rasche, Matt Richardson, Stefano Risa, Bent Sorensen, Stijn Van

Nieuwerburgh, James Vickery, Jeff Wurgler, and seminar participants at the Federal Reserve Bank of St. Louis;

the Florida Atlantic University; the International Monetary Fund; the second New York Fed—Princeton liquidity

conference; Lehman Brothers; the Baruch-Columbia-Stern real estate conference; NYU Stern Research Day;

Capula Investment Management; AQR Capital Management; the Conference on the Subprime Crisis and Economic Outlook in 2008 at Lehman Brothers; Freddie Mac; Federal Deposit and Insurance Corporation (FDIC);

U.S. Securities and Exchange Comission (SEC); Office of Federal Housing Enterprise Oversight (OFHEO);

Board of Governors of the Federal Reserve System; Carnegie Mellon University; Baruch; University of British

Columbia, University of Amsterdam; the 44th Annual Conference on Bank...