What really caused the subprime defaults?

Part 1 of 5: Upheaval in the subprime market
Published on May 21, 2007

(This is Part 1 of a five-part series. See Part 2, Part 3 Part 4 and Part 5.) Extensive payment problems among subprime mortgage borrowers, along with the failure of a number of subprime lenders, have been major news topics in recent months. Speculation about the causes of the defaults has been widespread. That is the topic of this article. Future articles will consider why so many lenders have failed, the impact of the crisis on the current availability of credit to prospective new subprime borrowers, and what -- if anything -- government should do. The final article will discuss whether the subprime market could and should be replaced, and, if so, by what. Ending of Price Appreciation: The immediate cause of turmoil in the subprime market was the end of house-price appreciation. Property values in most areas stopped rising in 2006, and in many areas they have since declined. This has led to a rise in delinquencies and defaults on what I call "appreciation-dependent mo...