The Subprime Mortgage Lending Collapse: Should We Have Seen It Coming?

Abstract

The subprime mortgage lending crisis and the decline in housing values has profoundly affected the worlds’ financial markets. Financial institutions have ceased to exist, others have come under the U.S. government’s control, the future survival of others has been threatened and the U.S. government is proposing the greatest financial rescue operation since the Great Depression. Profound changes in the financial markets have occurred and the markets will never be quite the same again. This paper presents the argument that this collapse should have been foreseen by tracing and comparing the development and decline in the subprime auto lending market in the 1990’s to the development and decline of the subprime mortgage lending market. While the effects of the subprime mortgage crisis are greater and farther reaching than those of the subprime auto lending market, there is no question that the similarities are plain to be seen and that the current crisis should come as no surprise.