The Subprime Mortgage Crisis: Could We Have Seen It Coming?

I take a close look at the history of subprime mortgage loans between 2001 and 2007 to see if there was any pattern evident that could have led people to foresee, and thus forestall, the crisis that occurred in 2007. Sadly, using standard econometric tools I find that by as early as 2005 it was possible to detect a serious deterioration of subprime loan quality.

This finding is detailed in joint work with Yuliya Demyanyk from the FRB St. Louis, which was presented at the Fed, IMF, SEC, FDIC, S&P, Lehman Brothers, among many other places, and can be downloaded at http://ssrn.com/abstract=1020396. Below I provide an executive summary.