Understanding the Roots of the US Subprime Crisis and its Subsequent Effects

In this paper we provide an overview of the roots, first manifestations and furtherdevelopments of the US subprime crisis and explain the securitization process byemphasizing especially the mortgage securitization process. Some explanations forthe ongoing financial crisis are also offered. We continue with a presentation ofthe US real estate sector and its main indicators.Finnally, we investigate the relationship between home mortgages growth andgross domestic product in the United States using quarterly observations for thetwo variables, covering the 2002-2008 time period. We find that curret GDP isexplained both by its own lagged value and by previous quarter change in homemortgages. A unidirectional Granger causality from home mortgages to the grossdomestic product is also attested. We can therefore report that a significant decreasein borrowing leads to an equally significant decrease in house prices andcauses a future economic slowdown, reflected by a decrease in the gross domesticproduct.