TAILIEUCHUNG - The Evolution of the Subprime Mortgage Market

Deposit insurance clearly introduces a different treatment of (some) bank deposits with respect to all other financial activities where saving can be allocated. It has the consequence of putting in a situation of comparative disadvantage other financial intermediaries with respect to banks, and, inside the banking sector, it favours deposit collection vis a vis other bank liabilities. Deposit protection involves a typical problem of moral hazard, providing more incentives for bank managers to undertake risks. Moreover, a moral hazard problem affects also depositors’ behaviour: by relying on the full reimbursement of their deposits’ nominal value, they have no interest. | The Evolution of the Subprime Mortgage Market Souphala Chomsisengphet and Anthony Pennington-Cross This paper describes subprime lending in the mortgage market and how it has evolved through time. Subprime lending has introduced a substantial amount of risk-based pricing into the mortgage market by creating a myriad of prices and product choices largely determined by borrower credit history mortgage and rental payments foreclosures and bankruptcies and overall credit scores and down payment requirements. Although subprime lending still differs from prime lending in many ways much of the growth at least in the securitized portion of the market has come in the least-risky A- segment of the market. In addition lenders have imposed prepayment penalties to extend the duration of loans and required larger down payments to lower their credit risk exposure from high-risk loans. Federal Reserve Bank of St. Louis Review January February 2006 ổổ 1 pp. 31-56. INTRODUCTION AND MOTIVATION Homeownership is one of the primary ways that households can build wealth. In fact in 1995 the typical household held no corporate equity Tracy Schneider and Chan 1999 implying that most households find it difficult to invest in anything but their home. Because homeownership is such a significant economic factor a great deal of attention is paid to the mortgage market. Subprime lending is a relatively new and rapidly growing segment of the mortgage market that expands the pool of credit to borrowers who for a variety of reasons would otherwise be denied credit. For instance those potential borrowers who would fail credit history requirements in the standard prime mortgage market have greater access to credit in the subprime market. Two of the major benefits of this type of lending then are the increased numbers of homeowners and the opportunity for these homeowners to create wealth. Of course this expanded access comes with a price At its simplest subprime lending can be described as high-cost

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