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The Subprime Mortgage Market

Chairman Ben S. Bernanke

At the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois

May 17, 2007 -- The recent sharp increases in subprime mortgage loan delinquencies and in the number of homes entering foreclosure raise important economic, social, and regulatory issues.  Today I will address a series of questions related to these developments.  Why have delinquencies and initiations of foreclosure proceedings risen so sharply?  How have subprime mortgage markets adjusted?  How have Federal Reserve and other policymakers responded, and what additional actions might be considered?  How might the problems in the market for subprime mortgages affect housing markets and the economy more broadly?

The Development of the Subprime Mortgage Market
Let me begin with some background.  Subprime mortgages are loans made to borrowers who are perceived to have high credit risk, often because they lack a strong credit history or have other characteristics that are associated with high probabilities of default.  Having emerged more than two decades ago, subprime mortgage lending began to expand in earnest in the mid-1990s, the expansion spurred in large part by innovations that reduced the costs for lenders of assessing and pricing risks.  In particular, technological advances facilitated credit scoring by making it easier for lenders to collect and disseminate information on the creditworthiness of prospective borrowers.  In addition, lenders developed new techniques for using this information to determine underwriting standards, set interest rates, and manage their risks.

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Last modified: 12/12/07