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nting their homes again (Crane, 2007).

2.1. THE SHIFTING COMPOSITION OF MORTGAGE LENDING

After recovering from the 2001 recession, the expansion of mortgage lending was in conformable and other prime mortgages, but as the boom proceeded, a larger fraction of the lending was for so-called 'non-prime' lending that consists of subprime, Alt –A and home equity lending (Baily Martin et al, 2008). Subprime mortgages are loans made to borrowers who are perceived to have high credit risk, often because they lack a strong credit history or have other characteristics that are associated with high probabilities of default. Having emerged more than two decades ago, subprime mortgage lending began to expand in earnest in the mid-1990s, the expansion spurred in large part by innovations that reduced the costs for lenders of assessing and pricing risks. In particular, technological advances facilitated credit scoring by making it easier for lenders to collect and disseminate information on the creditworthiness of prospective borrowers. In addition, lenders developed new techniques for using this information to determine underwriting standards, set interest rates, and manage their risks ( Bernake, Chairman, 2007).

In 2001 there were $2.2 trillion worth of mortgage originations, with 65 percent of these in the form of conventional conforming loans and Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans. An ad-ditional 20 percent were prime jumbo mortgages, issued to those with good credit buying houses that were too expensive to be conforming, meaning that 85 percent of originated loans in 2001 were prime quality. There was a huge expansion of mortgage lending over the next couple of years, and in 2003 nearly $4 trillion worth of loans were issued, but the share of prime mortgages remained steady at 85 percent as the volume of conformable mortgages soared ( Baily Martin et al. 2008. P. 14). The total volume of mortgage lending dropped af-ter 2003, to around $3 trillion a year in 2004-06 but the share of subprime and home equity lend-ing expanded greatly.

Total Mortgages organizations by Type: with share of each product; billions, percent. The increasing defaults in the summer of 2007 on mortgages signaled that the subprime market was in crisis. The prices of houses and financial stock started to drop. As a result, the value of household wealth in the US is dropped by trillions. These defaults and drops in house and stock prices were the main reason for the solvency of Fanny Mae and Freddie Mac as well as a number of well known international financial institutions ( Naude, Wim, 2009, P.3). Therefore, on 7 September 2008, the US government nationalized Fanny Mae and Freddie Mac (ibid). After that, on 15 September 2008, the firm of Lehman Brothers filed for bankruptcy; with US$639 billion in assets, it was the largest in the history of the US (ibid). This resulted in a great financial panic with large scale selling of stocks.

2.1.1. THE SUBPRIME MORTGAGE CRISIS

The subprime mortgage crisis is considered among the most serious economic events affecting the United States since the Great Depression of the 1930s. Subprime mortgage lending is considered a financial innovation. Subprime mortgage lending arises because of three factors (Bernanke, 2005). The first factor is related to the existence of previously