Risky mortgages and mortgage default premiums

John Krainer and Stephen LeRoy

FRBSF Economic Letter, 2010, issue dec20

Abstract: Mortgage lenders impose a default premium on the loans they originate to compensate for the possibility that borrowers won?t make payments. The housing boom of the 2000s was characterized by increasing riskiness of the borrowers approved for mortgages and the structures of the loans themselves. Despite these changes in risk, a pricing model can justify the spreads contained in mortgages made during this period based on what at the time seemed to be reasonable expectations for house price appreciation. Contrary to those expectations, prices fell dramatically.

Keywords: Default (Finance); Mortgage loans (search for similar items in EconPapers)
Date: 2010
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