Making sense of the subprime crisis

This paper explores the question of whether market participants could have or should have anticipated the large increase in foreclosures that occurred in 2007 and 2008. Most of these foreclosures stemmed from loans originated in 2005 and 2006, leading many to suspect that lenders originated a large volume of extremely risky loans during this period. However, the authors show that while loans originated in this period did carry extra risk factors, particularly increased leverage, underwriting standards alone cannot explain the dramatic rise in foreclosures. Focusing on the role of house prices, the authors ask whether market participants underestimated the likelihood of a fall in house prices or the sensitivity of foreclosures to house prices. The authors show that, given available data, market participants should have been able to understand that a significant fall in prices would cause a large increase in foreclosures although loan-level (as opposed to ownership-level) models would have predicted a smaller rise than actually occurred. Examining analyst reports and other contemporary discussions of the mortgage market to see what market participants thought would happen, the authors find that analysts, on the whole, understood that a fall in prices would have disastrous consequences for the market but assigned a low probability to such an outcome.Subprime mortgage

Making sense of the subprime crisis

This paper explores the question of whether market participants could have or should have anticipated the large increase in foreclosures that occurred in 2007 and 2008. Most of these foreclosures stem from loans originated in 2005 and 2006, leading many to suspect that lenders originated a large volume of extremely risky loans during this period. However, the authors show that while loans originated in this period did carry extra risk factors, particularly increased leverage, underwriting standards alone cannot explain the dramatic rise in foreclosures. Focusing on the role of house prices, the authors ask whether market participants underestimated the likelihood of a fall in house prices or the sensitivity of foreclosures to house prices. The authors show that, given available data, market participants should have been able to understand that a significant fall in prices would cause a large increase in foreclosures, although loan-level (as opposed to ownership-level) models would have predicted a smaller rise than actually occurred. Examining analyst reports and other contemporary discussions of the mortgage market to see what market participants thought would happen, the authors find that analysts, on the whole, understood that a fall in prices would have disastrous consequences for the market but assigned a low probability to such an outcome.Subprime mortgage ; Financial crises ; Foreclosure

Sources of small family farm production inefficiency, recôncavo region, Bahia, Brazil

The main objective of this study was to identify and analyze the sources of inefficiency in family operated small agricultural properties in the Brazilian state of Bahia’s Recôncavo region from a sample of 44 producers. A non-parametric approach, in the context of cost minimizing behavior under constant returns to scale, was used to estimate the indices of technical, scale, allocative, and total (economic or cost) efficiency. Results indicated that the largest source small family farm inefficiency in the Recôncavo region is allocative inefficiency, that is to say, the non-observance of price relationships when making production decisions. On the average, 79.1% of these farms’ total inefficiency is due to allocative inefficiency, 9.3% to technical inefficiency, and 11.7% to scale inefficiency