Ben Bernanke argues that subprime mortgage lending is a natural and positive outgrowth of financial innovation. Although some problems have occured they are being self-corrected and do not threaten the financial system.
…subprime mortgage lending began to
expand in earnest in the mid-1990s, the expansion spurred in large part by
innovations that reduced the costs for lenders of assessing and pricing risks.
In particular, technological advances facilitated credit scoring by making it
easier for lenders to collect and disseminate information on the
creditworthiness of prospective borrowers. In addition, lenders developed new
techniques for using this information to determine underwriting standards, set
interest rates, and manage their risks.
The ongoing growth and development of the secondary mortgage market has
reinforced the effect of these innovations. Whereas once most lenders held
mortgages on their books until the loans were repaid, regulatory changes and
other developments have permitted lenders to more easily sell mortgages to
financial intermediaries, who in turn pool mortgages and sell the cash flows as
structured securities. These securities typically offer various risk profiles
and durations to meet the investment strategies of a wide range of investors.
The growth of the secondary market has thus given mortgage lenders greater
access to the capital markets, lowered transaction costs, and spread risk more
broadly, thereby increasing the supply of mortgage credit to all types of
The expansion of subprime mortgage lending has made homeownership possible
for households that in the past might not have qualified for a mortgage and has
thereby contributed to the rise in the homeownership rate since the mid-1990s…
As the problems in the subprime mortgage market have become manifest, we have
seen some signs of self-correction in the market. Investors are scrutinizing
subprime loans more carefully and, in turn, lenders have tightened underwriting
standards. Credit spreads on new subprime securitizations have risen, and the
volume of mortgage-backed securities issued indicates that subprime originations
have slowed. But although the supply of credit to this market has been
reduced–and probably appropriately so–credit has by no means evaporated.