An Analysis of the Determinants of the Sub-Prime Mortgage Crisis

This dissertation explores the determinants of the sub-prime mortgage crisis, which originated in the US and propagated globally. It discusses the background of sub-prime mortgages, the role of low credit scores, and the initial low-interest rates that fueled the crisis. The dissertation highlights the rapid increase in house prices and the Federal Reserve's subsequent raising of interest rates, leading to the collapse of sub-prime lenders and a drastic reduction in house prices. The impact on investors, banks, and the overall economy, including the rise of ghost villages and the global loss of confidence, are examined. The role of fraudulent brokers and the eventual realization by borrowers of their unaffordability are also discussed. The dissertation further promises to cover the problem statement, research questions, objectives, limitations, literature review, research methodology, data analysis, findings, conclusions, and recommendations related to the sub-prime mortgage crisis.

Dissertation on the determinants of the
sub-prime mortgage crisis

Table of Contents
Chapter 1: Introduction....................................................................................................................3
1.1 Research Background............................................................................................................3
1.2 Problem Statement.................................................................................................................4
1.3 Research Question.................................................................................................................4
1.4 Research Objective................................................................................................................4
1.5 Research Limitations.............................................................................................................4
1.6 Gap of Research.....................................................................................................................4
1.7 Thesis Outline........................................................................................................................4
Chapter 2: Literature Review...........................................................................................................4
2.1 Theoretical Framework..........................................................................................................4
2.2 Literature Review..................................................................................................................4
2.3 Proposed Theoretical Framework..........................................................................................5
2.4 Selected Determinants and Hypothesized Relation...............................................................5
Chapter 3: Research Methodology..................................................................................................5
3.1 Research Approach................................................................................................................5
3.2 Summary of Determinants and Hypotheses..........................................................................5
3.3 Time Period and Data Collection..........................................................................................5
3.4 Sample and Exclusions..........................................................................................................5
3.5 Research Variables................................................................................................................5
3.5.1 Measurement of the Dependent Variable.......................................................................5
3.5.2 Measurement of the Independent Variables...................................................................5
3.5.3 Summary of Measurements............................................................................................5
3.5.4 GRETL...........................................................................................................................5
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Chapter 4: Data Analysis and Findings...........................................................................................5
4.1 Descriptive Statistics.............................................................................................................5
4.2 Augmented-Dickey Fuller.....................................................................................................6
4.3 Correlation Matrix.................................................................................................................6
4.4 Multicollinearity....................................................................................................................6
4.5 Ordinary Least Squares..........................................................................................................6
4.6 Summary of Empirical Findings............................................................................................6
Chapter 5: Summary Findings, Conclusion, Recommendations.....................................................6
5.1 Introduction............................................................................................................................6
5.2 Statistical Findings.................................................................................................................6
5.3 Limitations.............................................................................................................................6
5.4 Recommendations..................................................................................................................6
5.5 Conclusions............................................................................................................................6
6.0 References..................................................................................................................................6
7.0 Appendixes................................................................................................................................6
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Chapter 1: Introduction
1.1 Research Background
This dissertation describes the various factors of the sub-prime mortgage crisis. In this
section of the dissertation, the background of the sub-prime mortgage crisis will discuss. A
subprime mortgage is a type of loan. This loan is granted for individuals with lower credit score.
In general, the loan given to the persons having a credit score below 640 is considered as a
subprime mortgage. Subprime mortgages are highly riskier than a conventional mortgage.
Because in this loan the borrower's credit score is too low. It reflects their poor track record on
repaying the loans. They failed to repay the loans within the time. But it gives higher interest
rates than conventional loans.
In 2007 the whole world noticed the financial crisis. It is initiated in the US economy and
is propagated to the other economies. This crisis can't occur on a single night. In early 2000 the
interest rates on the house are quite low. So many people applied for credit payments under the
subprime category. It increased the subprime mortgages directly. Suddenly the rapid increase in
the house prices is noticed. Federal Reserve raised the interest rates to reduce the inflation rate
rise. Within two years it is increased double times. In 2004 the interest rate was 2.25%, and it
was increased to 5.25% in 2006. It impacted on the performance of the subprime money lender's
performance. Many of them shut down their business.
At the effect of these incidents, the price of the house is getting reduced tremendously. It
suffered many new investors. Because the interest on the mortgage is increased drastically, many
of the investors could not repay their loan amount. Many of them sold their houses at very low
prices. It caused huge losses to the investors. Banks foreclosed the houses. Because of these
issues, many villages became ghost villages. Because most of the peoples lost their houses, it
not only affected the subprime mortgages, peoples who got a good credit score and qualified the
standard mortgage also affected by these events.
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Here the influence of the fraud brokers played a significant role. Many of the lenders and
brokers fueled the event by giving inaccurate details about the loan. Once the price of the house
got reduced, the truth got revealed automatically. Many of the borrowers know that they are not
affordable for that. But they realized too late.
The collapse of the US economy caused on the subprime mortgage market and the
reversal of the housing boom affected mainly the US economy. Also, the effects are seen on the
entire global economy. Due to this problem, many of the world's largest economies last their
credibility. Some of the institutions were shut down. Europe faced higher impacts next to the US.
In Europe, many of the banks failed. These institutions needed external support.It reduced
international trade performance. The economic growth of many countries faced a huge decline. It
created a loss of confidence in the global economy. Unemployment also caused by this event.
To be continued
1.2 Problem Statement
1.3 Research Question
1.4 Research Objective
1.5 Research Limitations
1.6 Gap of Research
1.7 Thesis Outline
Chapter 2: Literature Review
2.1 Theoretical Framework
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2.2 Literature Review
2.3 Proposed Theoretical Framework
2.4 Selected Determinants and Hypothesized Relation
Chapter 3: Research Methodology
3.1 Research Approach
3.2 Summary of Determinants and Hypotheses
3.3 Period and Data Collection
3.4 Sample and Exclusions
3.5 Research Variables
3.5.1 Measurement of the Dependent Variable
3.5.2 Measurement of the Independent Variables
3.5.3 Summary of Measurements
3.5.4 GRETL
Chapter 4: Data Analysis and Findings
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4.1 Descriptive Statistics
4.2 Augmented-Dickey Fuller
4.3 Correlation Matrix
4.4 Multicollinearity
4.5 Ordinary Least Squares
4.6 Summary of Empirical Findings
Chapter 5: Summary Findings, Conclusion, Recommendations
5.1 Introduction
5.2 Statistical Findings
5.3 Limitations
5.4 Recommendations
5.5 Conclusions
6.0 References
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7.0 Appendixes
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