Great Recession Essay

The importance of consumer lending became obvious during the Great Recession. One key factor of the Great Recession was due to the increase subprime and near-prime lending which was further aggravated by the securitization of these loans. The Financial Crisis of 2008 followed similar trends to other crisis (Demyanyk & Van Hemert, 2011). First, there was an evident boom in the subprime mortgage market. Second, a bust occurred in 2007 which is signaled by house foreclosures, high delinquencies and default rates. The subprime crisis led to spill over into other credit markets. The crisis intensified when underwriting standards deteriorated along with loan quality which led to an increase in loan risk that was not reflected by an increase in price, which led to a collapse
In 2009, these figures increased to 13% and 25% respectively. While many blamed the nontraditional features involved in mortgage contracts, Mayer, Pence and Sherlund (2009), found that the biggest reason delinquency rates were so high was because it was originated to borrowers with low credit score and high loan-to-value ratios. LaCour-Little & Zhang (2014) looked at estimating the probability of default and loss given default for home equity loans around the time of the financial crisis. In this paper, they compiled data from large commercial banks, where loans were originated during 2004-2008 and tracked from 2008-2012. They are particularly interested in the relationship between loan outcomes and the lender decision to securitize the asset. After they examined loan performances, including LGD for home equity loans they found that there was an increase in the probability of default among the particular loans that were securitized. Lending to the corporate sector through loan syndication also suffered during the 2008 Financial Crisis (Ivashina & Scharfstein, 2010). There was a 37% drop in lending during September through November period prior to the past three