10 Myths over subprime mortgages

Yuliya Demyanyk points to 10 myths about subprime lending in this loan. The lost includes virtually everything under the sun.

Myth 1: Subprime mortgages went only  to borrowers with impaired credit

Myth 2: Subprime mortgages promoted homeownership

Myth 3: Declines in home values caused  the subprime crisis in the United States

Myth 4: Declines in mortgage underwriting standards
triggered the subprime crisis

Myth 5: Subprime mortgages failed because people used homes as ATMs

Myth 6: Subprime mortgages failed because of mortgage rate resets

Myth 7: Subprime borrowers with hybrid mortgages  were offered (low) “teaser rates”

Myth 8: The subprime mortgage crisis in the United States  was totally unexpected

Myth 9: The subprime mortgage crisis in the United States  is unique in its origins

Myth 10: The subprime mortgage market was too small to cause big problems

In the end she says:

Many of the myths presented here single out some characteristic of subprime loans, subprime borrowers, or the economic circumstances in which those loans were made as the cause of the crisis. All these factors are certainly important for borrowers with subprime mortgages in terms of their ability to keep their homes and make regular mortgage payments. A borrower with better credit characteristics, a steady job, a loan with a low interest rate, and a home whose value keeps increasing is much less likely to default on a mortgage than a borrower with everything in reverse.

But 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. The crisis had been building for years before showing any signs. It was feeding off the lending, securitization, leveraging, and housing booms.

She has even written a paper to explain a few ideas about the sub-prime market.

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One Response to “10 Myths over subprime mortgages”

  1. Tirath Muchhala Says:

    This does not belong to this post – but it might be of interest to you.
    Regarding structured finance

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1287363

    Similar to one of your very early posts regarding CDOs in Australia.

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