The subprime mortgage market

The financial crisis started with defaults?borrowers not repaying their loans?on subprime mortgages in the United States.

Subprime mortgages have which of the following characteristics?Check all that apply.

(A) They are made on homes in areas outside of prime areas.

(B) They have a higher likelihood of default.

(C) They are made to people with relatively poor credit history.

Subprime mortgages expanded to about 35% of all mortgages issued in the United States in 2004. Which of the following could have decreasedthe growth of these mortgages?Check all that apply.

(A) The Federal Reserve setting low interest rates in the early part of the 2000s

(B) The phasing-out of financial instruments that allowed for securitization of subprime mortgages

(C) Banks maintaining traditional levels of leverage

(D) A shift to lower-risk investments by investors

On the graph, show the primary effect of a contraction of the mortgage market on the housing market. Shift the demand curve or the supply curve for housing.