Mortgage originations during 2002-2007 as an example of an evolutionary market

The mortgage market in the United States in the early and mid-2000’s underwent a substantial shift in both the quality of loans and the nature of the products offered which eventually led to the financial collapse of 2007. However, this change did not happen all at once, instead there was a gradual shift over time as experimenting firms learned that they could sell lower quality loans into the market and other firms were forced to follow along or lose market share. Mortgages started from a position of a stable market with high-quality loans and then shifted over time to a market characterized by continually declining quality and then shifted again sharply back towards high quality, although now requiring government intervention for support. This same pattern was seen across a number of different characteristics of the market. This paper shows how and why the shift happened from an evolutionary perspective and discusses the implications of this kind of behavior for understanding this period and also for possible developments in the future.