The subprime mess - how did we get here?

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A recent IMF paper tries to understand what caused the recent deterioration of lending standards in the U.S. and shows that many parties have to take some blame. Lending standards in the subprime market deteriorated in markets with more competition, faster rising house prices and better opportunities to securitize loans once they're originated.

The relaxation of lending standards was stronger during times of lax monetary policy. While loan decisions in the prime market still seemed to follow fundamentals such as borrower characteristics, this certainly did not hold for the subprime market.

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