Understanding the Roots of the US Subprime Crisis and its Subsequent Effects

In this paper we provide an overview of the roots, first manifestations and further developments of the US subprime crisis and explain the securitization process by emphasizing especially the mortgage securitization process. Some explanations for the ongoing financial crisis are also offered. We continue with a presentation of the US real estate sector and its main indicators. Finnally, we investigate the relationship between home mortgages growth and gross domestic product in the United States using quarterly observations for the two variables, covering the 2002-2008 time period. We find that curret GDP is explained both by its own lagged value and by previous quarter change in home mortgages. A unidirectional Granger causality from home mortgages to the gross domestic product is also attested. We can therefore report that a significant decrease in borrowing leads to an equally significant decrease in house prices and causes a future economic slowdown, reflected by a decrease in the gross domestic product.