Could the subprime crisis have been predicted? A mortgage risk modeling approach

The abnormally high mortgage default rates that became apparent in early 2007 were not foreseen in June 2005, when mortgage production reached its peak. Could the significant increase in mortgage defaults and the resultant subprime crisis have been predicted? This paper develops a mortgage-level predictive model for mortgage default and delinquency rates, based on a logistic regression and Markov chain framework. The results are compared against actual mortgage level default data and provide strong evidence that the high US nonprime mortgage default rates which triggered the crisis were already predictable in mid-2005 using historical data only available at the time.