The Subprime Crisis: An Analysis of New England in 2006

This paper examines the potential causes of the subprime loan crisis and discusses its impact in the United States. The root causes of the crisis include unethical practices by brokers and lenders, a lack of corrective action by credit rating agencies, lax regulation by the Federal Government of independent mortgage companies and the role of Wall Street. First, I examine the lax lending practices over this time period by comparing the performance of mortgage pools by three well known high-priced lenders over a two year period (2005 – 2006). I find strong evidence of poorer underwriting in the latter year. Second, using the 2006 Home Mortgage Disclosure Data (HMDA), I further analyze the lending patterns and the prevalence of higher priced loans in New England to assess the extent of potential problems. I find that in 2006 African Americans and Hispanics were significantly more likely to get a higher cost loan compared to white individuals in New England despite similar income and loan amounts. Finally, I conclude by summarizing existing flaws in the system and proposing some solutions to help better educate mortgage consumers.