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During the period of 2007-2012, the USA economy has experience an economic crisis
(Business Today, 2015). The house market crisis, also termed as subprime mortgage crisis, was
considered as impetus factor of this crisis. Along with the other causes, lack of due diligence
(low customer assessment and documentation), and adverse selection is considered as one of the
cause of the subprime mortgage crisis. Households’ net worth, households saving, and household
disposable income are factors that are considered to assess the creditworthiness and granting loan
to the customers. But it was found that the customers’ loans were not made in consideration of
these creditworthiness factors (Business Today, 2015).
This paper aims at understanding the underlying relationship of total mortgage loan
outstanding with the household net worth, household savings, and household disposable income.
The overall intention is to observe where outstanding mortgage loan was affected by households’
net worth, households saving, and household disposable income. Based on that it can be
understood whether the loans were granted in consideration of households’ net worth,
households saving, and household disposable income (the variables based on which the
customers’ loan repayment ability can be judged), or in consideration of others.
Several analysts and writer on theoretical basis have tried to point out the impact of lack of due
diligence and adverse selection on the mortgage bubble. These theoretical studies strongly
blamed the lack of due diligence and adverse selection as cause of the high and undesirable
mortgage loan disbursement, and mortgage loan problem (Business Today, 2015). No empirical
historical studies are found on which regression analysis was employed to assess whether loans during the
pre-crisis period was not granted in consideration of these creditworthiness factors.
But this study...
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