The subprime mortgage market: familiar lessons in a new context

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Abstract
Purpose – The purpose of this paper is to examine the recent subprime mortgage market meltdown from a theoretical and practical perspective. Design/methodology/approach – The authors apply the principles of transaction costs economics to critically evaluate the roles of lenders, borrowers, institutions, and investors. Findings – It is found that a combination of need, greed, perverse incentives, inadequate risk controls, lax regulation, and lax oversight caused a bubble in the subprime mortgage market which has inevitably burst. The principles of transaction cost economics provide a template for analysis and corrective action. Research limitations/implications – The subprime mortgage market provides a useful example of where theory can provide helpful insights. The example has implications for future research in other financial market settings. Practical implications – The results provide insight and guidance to lenders, borrowers, institutions, investors, regulators, and central bankers in how to identify and handle potentially toxic financial scenarios. Originality/value – The theoretical perspective has not been applied to the subprime market or other similar financial settings. It offers both academic and practical contributions.

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