What Caused the Housing Bust (9)

The first sign of trouble


The first sign of trouble was an unexpectedly high default rate in subprime mortgages.

Beginning in early 2007, studies of 20-month-old subprime mortgages showed a default rate greater than 5%, much higher than expected.

According to Countrywide Mortgage, the default rates on the riskiest loans made in 2005 and 2006 are expected

to grow to as high as 20% – a new all-time record.


The big jump in subprime defaults led to the first hedge-fund blowups,

such as the May 2007 shutdown of Dillon Reed Capital Management,

which lost $150 million in subprime investments in the first quarter of 2007.




By Porter Stansberry