Subprime Mortgage Lending and the Capital Markets

1. What is a subprime mortgage loan?

2. Subprime mortgage lending grew at an average annual rate of 26 percent between 1994 and 2000. What accounts for this rapid rate of growth?

3. What is securitization? How has securitization strengthened links between the subprime mortgage market and the broader capital markets? What are the implications of stronger links between these markets?

4. Does examination of interest rates on subprime mortgages, prime mortgages, Treasury notes, and junk bonds suggest a strengthening of the links between the subprime mortgage and broader capital markets? Explain.

Source: “Subprime Mortgage Lending and the Capital Markets.” Elizabeth Laderman, Federal Reserve Bank of San Francisco FRBSF Economic Letter, No. 2001-38, December 28, 2001, pp. 1-3.