Jaffee, Dwight M.2017-08-282017-08-282008https://hdl.handle.net/10986/28008The subprime mortgage crisis ranks among the most serious economic events affecting the United States since the great depression of the 1930s. This study analyzes key issues raised by the crisis at three levels: (i) issues directly and specifically relating to subprime mortgage lending; (ii) issues relating to the securitization of subprime mortgages; and (iii) issues affecting financial markets and institutions. These issues are fundamental to risk bearing, sharing, and transfer in financial markets and institutions around the world. Many of the issues raised by the U.S. subprime crisis also apply to high-risk loan markets in developing countries. The framework applied in the paper analyzes subprime mortgage lending as a major financial market innovation. Although conditions were conducive for subprime lending to arise as a financial innovation, financial innovations are necessarily risky undertakings, all the more so when they create new classes of risky loans and securities. The lessons learned from the crisis can thus be usefully applied to issues of the growth and development of emerging economies, as well as pointing the way to the design of new and efficient policies for subprime lending in the developed economies.en-USCC BY 3.0 IGOACCOUNTINGARBITRAGEASSET CLASSASSET MANAGERSASSET-BACKED SECURITIESASYMMETRIC INFORMATIONAUCTIONAUTO LOANSBAILOUTBANK INVESTORSBANK LENDERSBANKING REGULATIONSBANKING SYSTEMBANKRUPTCYBENEFICIARIESBORROWERBROKERSCAPITAL MARKETCAPITAL MARKETSCAPITAL REQUIREMENTSCATASTROPHE BONDSCOLLATERALCOMMERCIAL BANKCOMMERCIAL BANKSCOMMERCIAL MORTGAGECOMMERCIAL MORTGAGESCOMMERCIAL PAPERCOMMERCIAL PAPER MARKETCOMPETITIVE MARKETCONSUMER BORROWERSCONSUMER LOANSCONSUMER PROTECTIONCONSUMER PROTECTION LEGISLATIONCONTRACT DESIGNCONTRACT DESIGNSCOUPONCOUPONSCREDIT CARDCREDIT DEFAULTCREDIT DEFAULT SWAPSCREDIT ENHANCEMENTSCREDIT QUALITYCREDIT RATINGCREDIT RATING AGENCIESCREDIT RATINGSCREDITORSCREDITWORTHINESSCURRENCYDEBTDEBT INSTRUMENTSDEBT OBLIGATIONDEBT OBLIGATIONSDEBT OUTSTANDINGDEBT RATIOSDEBT SECURITIESDEBT SERVICEDEFAULT PROBABILITIESDEFAULT RATEDEFAULT RATESDEFAULT RISKDEFAULTSDEFICITSDEPOSITDEPOSITORY INSTITUTIONSDEPOSITSDERIVATIVEDERIVATIVE INSTRUMENTSDERIVATIVE MARKETDERIVATIVE MARKETSDERIVATIVESDEVELOPING COUNTRIESDIVERSIFIED INVESTORSDIVERSIFIED PORTFOLIOSDUE DILIGENCEECONOMIC GROWTHEMERGING ECONOMIESEMERGING ECONOMYEXCHANGE COMMISSIONEXPENDITURESFEDERAL RESERVEFINANCIAL CRISISFINANCIAL DEVELOPMENTFINANCIAL DISTRESSFINANCIAL INSTITUTIONSFINANCIAL MARKETFINANCIAL MARKETSFINANCIAL RISKFINANCIAL SERVICE PROVIDERSFINANCIAL SYSTEMFISCAL POLICIESFLOATING RATESFORECLOSUREFORECLOSURESFOREIGN CAPITALFOREIGN EXCHANGEFRAUDFUTURESFUTURES MARKETGOVERNMENT GUARANTEEGOVERNMENT GUARANTEESGOVERNMENT REGULATIONHEDGE FUNDHEDGE FUNDSHOLDINGHOME LOANHOME MORTGAGEHOME MORTGAGESHOMEOWNERSHIPILLIQUID MARKETSILLIQUIDITYINDIVIDUAL INVESTORSINDIVIDUAL LOANINFLATIONINSTITUTIONAL INVESTORSINSTRUMENTINSURANCEINTEREST RATEINTEREST RATE RISKINTEREST RATESINTERNATIONAL BANKINTERNATIONAL DEVELOPMENTINTERNATIONAL SETTLEMENTSINVENTORYINVESTMENT ACTIVITIESINVESTMENT BANKINVESTMENT BANKSINVESTMENT DECISIONSINVESTMENT FUNDSINVESTMENT POLICYINVESTMENT PORTFOLIOSINVESTMENT STRATEGIESINVESTMENT STRATEGYINVESTMENT VEHICLESINVESTOR LOSSESLEGAL PROHIBITIONSLEGAL SYSTEMLENDERLENDERSLIABILITYLIENLINE OF CREDITLIQUIDATIONLIQUIDITY CRISESLOANLOAN APPLICATIONLOAN APPLICATIONSLOAN DEFAULTLOAN DEFAULTSLOAN DEMANDSLOAN MARKETSLOAN OFFICERSLOAN PERFORMANCELOAN TERMSLOAN VOLUMESLOANABLE FUNDSLOCAL BANKLONG TERM CAPITALLONG-TERM CAPITALLONG-TERM DEBTMARK TO MARKETMARK TO MARKET ACCOUNTINGMARKET DEVELOPMENTSMARKET DISCIPLINEMARKET ECONOMYMARKET FAILURESMARKET LIQUIDITYMARKET PARTICIPANTSMARKET PRICESMARKET STABILITYMARKET TRADINGMARKET VALUEMATURITYMATURITY MISMATCHMATURITY MISMATCHESMONETARY AUTHORITYMONETARY POLICIESMONETARY POLICYMORAL HAZARDMORTGAGEMORTGAGE BONDSMORTGAGE FINANCEMORTGAGE LOANMORTGAGE LOANSMORTGAGE MARKETMORTGAGE MARKETSMORTGAGE-BACKED SECURITIESMORTGAGESNATURAL DISASTERNATURAL DISASTERSOUTSTANDING AMOUNTOUTSTANDING LOANSPENSIONPORTFOLIOPORTFOLIOSPRINCIPAL PAYMENTSPROBABILITY OF DEFAULTPROPERTY RIGHTSPRUDENTIAL REGULATIONREAL ESTATE COLLATERALREAL ESTATE LOANSREGULATORY FRAMEWORKREGULATORY STRUCTURERETURNRETURNSRISK ASSESSMENTSRISK MANAGEMENTRISK OF DEFAULTRISKY LOANRISKY LOANSRISKY SECURITIESSECURITIESSECURITIES INDUSTRYSETTLEMENTSETTLEMENT SYSTEMSSHORT-TERM BORROWINGSSTOCK BROKERSSTOCK MARKETTAXTRADINGTRANCHETRANCHESTRANSACTIONTRANSACTION COSTSTRANSITION ECONOMIESTREASURYTREASURY BONDSUNDERLYING MORTGAGESUNDERWRITERSVARIABLE RATEWorking PaperWorld Bank10.1596/28008