Journal of Law, Finance, and Accounting > Vol 3 > Issue 1

The Nonprime Mortgage Crisis and Positive Feedback Lending

Bernard S. Black, Northwestern University, USA, , Charles K. Whitehead, Cornell Law School, USA, , Jennifer Mitchell Coupland, Northwestern University, USA,
Suggested Citation
Bernard S. Black, Charles K. Whitehead and Jennifer Mitchell Coupland (2018), "The Nonprime Mortgage Crisis and Positive Feedback Lending", Journal of Law, Finance, and Accounting: Vol. 3: No. 1, pp 1-57.

Publication Date: 31 May 2018
© 2018 B. S. Black, C. K. Whitehead, and J. M. Coupland
JEL Codes: G14, G38, K22
Due diligenceSecurities offeringsBanksAuditorsRating agencies


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In this article:
1. Introduction 
2. Nonprime Mortgage Risks Were Many and Obvious 
3. Nonprime MBSall Risks Were Understated by the Rating Agencies But Obvious to Anyone Who Chose to Look 
4. Some Thoughts Toward Reform 
5. Conclusion 


The great recession of 2007–2009 was sparked by a bubble in U.S. housing prices, driven in turn by a bubble in nonprime mortgage lending. We collect evidence that the risk of a nonprime housing bubble (not the certainty, but a meaningful risk) should have been obvious to the main participants in the markets for nonprime lending and related mortgage-backed securities (nonprime MBS), including originators, securitizers, rating agencies, money managers, and institutional investors. Those who did not see the risk were, in many cases, willfully blind. We also discuss the strong positive feedback nature of typical nonprime mortgages. This positive feedback made it highly likely that, if nonprime housing prices flattened, let alone fell, they would soon crash and take many nonprime MBS with them. We discuss regulatory responses that might limit positive feedback lending, cause the next bubble to be smaller and less likely, and make the post-bubble aftermath less painful.