Abstract

From 2006 onwards, real estate markets in different regions in the US experienced declines in house prices, after a period of double-digit growth rates between 2000 and 2005. These declines in house prices, coupled with rising interest rates seriously affected the borrowers of subprime mortgages, with a large number of them defaulting on their loans. The high rate of defaults in subprime loans was seen as an indicator of the worsening situation in the housing market and the US economy as a whole. The case discusses the growth of the US mortgage market. It describes the boom period of the US mortgage market between 2000 and 2004 and the resultant expansion in subprime lending. It also attempts to describe the reasons behind the US subprime mortgage crisis in 2006-07.

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Learn about the evolution of the US mortgage market.
• Understand the reasons for the crisis in the US housing market.
• Understand the role of the different players in creating the crisis.
• Discuss the benefits to the US economy from the growth in subprime lending, as well as the problems.

Keywords

US Housing Market, Mortgages, Subprime Crisis, Mortgage-backed Securities, Housing bubble, Secondary Mortgage market, Federal Funds Rate, Collateralized Debt obligations