The subprime mortgage market: familiar lessons in a new context

Abstract

Purpose

The purpose of this paper is to examine the recent subprime mortgage market meltdown from a theoretical and practical perspective.

Design/methodology/approach

The authors apply the principles of transaction costs economics to critically evaluate the roles of lenders, borrowers, institutions, and investors.

Findings

It is found that a combination of need, greed, perverse incentives, inadequate risk controls, lax regulation, and lax oversight caused a bubble in the subprime mortgage market which has inevitably burst. The principles of transaction cost economics provide a template for analysis and corrective action.

Research limitations/implications

The subprime mortgage market provides a useful example of where theory can provide helpful insights. The example has implications for future research in other financial market settings.

Practical implications

The results provide insight and guidance to lenders, borrowers, institutions, investors, regulators, and central bankers in how to identify and handle potentially toxic financial scenarios.

Originality/value

The theoretical perspective has not been applied to the subprime market or other similar financial settings. It offers both academic and practical contributions.

Citation

Johnson, L.D. and Neave, E.H. (2008), "The subprime mortgage market: familiar lessons in a new context", Management Research News, Vol. 31 No. 1, pp. 12-26. https://doi.org/10.1108/01409170810845921