The Mortgage Market Crisis: A Game Theory Analysis

Raquel Mato, Florida State University

Abstract

The mortgage market experienced a global bubble during the early 2000s. The bubble burst in 2006, creating a global financial crisis with widespread repercussions. In this paper, I will discuss how the mortgage market normally works and what changes occurred leading up to the 2000s that allowed for the rapid expansion of the mortgage market. I will talk about contributing factors such as: deregulation of the market, government encouragement of homeownership, the mortgage backed securities market, existing legislation, and a general lack of responsibility by all parties involved. I will use various aspects of game theory to explain how this crisis occurred and whether current and new legislation will help prevent a future bubble. I will also address what is still needed to help prevent or minimize a future bubble.