From risk-limited to risk-loving mortgage markets: origins of the US subprime crisis and prospects for reform

This paper examines the origins of the U.S. subprime crisis that reached clear national scale in early 2007, but it does so with somewhat more historical perspective than has been done in many places. It describes the shift during the latter decades of the twentieth century of the U.S. mortgage market from a risk-limited market to a risk-loving one and demonstrates that this shift was the result of what often appeared to be fairly obscure federal policy decisions. It also points out that the 2007 subprime crisis was preceded by an earlier, "first" subprime crisis in the late 1990s that had severe effects on many minority neighborhoods in the U.S., but that had much smaller effects on financial markets. The later crisis was partly the result of policymakers failing to respond to the earlier and quite severe problems in the subprime market. Finally, proposals since late 2008 to increase regulation of the U.S. mortgage market are described, and the evolution of those proposals toward actual legislation and regulatory impact is discussed.