Dating the timeline of financial bubbles during the subprime crisis

On a practical level, risk was “off the radar screen” because many gauges of mortgage loan quality available at the time were based on prime, rather than new, mortgage products.When house prices peaked, mortgage refinancing and selling homes became less viable means of settling mortgage debt and mortgage loss rates began rising for lenders and investors.The subprime mortgage crisis of 2007–10 stemmed from an earlier expansion of mortgage credit, including to borrowers who previously would have had difficulty getting mortgages, which both contributed to and was facilitated by rapidly rising home prices.Historically, potential homebuyers found it difficult to obtain mortgages if they had below average credit histories, provided small down payments or sought high-payment loans.In that era, homeownership fluctuated around 65 percent, mortgage foreclosure rates were low, and home construction and house prices mainly reflected swings in mortgage interest rates and income.In the early and mid-2000s, high-risk mortgages became available from lenders who funded mortgages by repackaging them into pools that were sold to investors.To assess this empirically, we employ a novel test of the unit root null against a mildly explosive alternative to investigate multiple bubbles in the crude oil spot and a range of futures prices along the yield curve employing monthly and weekly data from 1995 to 2013.

Simulations explore the finite sample performance of the strategy for dating market recovery.This enabled more first-time homebuyers to obtain mortgages (Duca, Muellbauer, and Murphy 2011), and homeownership rose.The resulting demand bid up house prices, more so in areas where housing was in tight supply.New financial products were used to apportion these risks, with private-label mortgage-backed securities (PMBS) providing most of the funding of subprime mortgages.The less vulnerable of these securities were viewed as having low risk either because they were insured with new financial instruments or because other securities would first absorb any losses on the underlying mortgages (Di Martino and Duca 2007).

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