Collateral Value and Subprime Loans

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In this paper, we overview studies on the subprime crisis and consider how the lending boom translated into a crisis by focusing on the role of collateral. In brief, the cause for the commencement of subprime lending was optimistic expectations that housing prices would increase continuously such that lenders could seize sufficient value of collateral to cover the entire loan repayment. However, once prices deteriorated, investors began to sell assets and the collateral value depreciated. Accordingly, subprime loans were no longer solvent, and this obliged investors to further sell the underlying assets. We discuss how the specific nature of subprime lending affects this boom-bust phenomenon.

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