Borrower Self-Selection, Underwriting Costs, and Subprime Mortgage Credit Supply

Joseph Nichols (), Anthony Pennington-Cross and Anthony Yezer

The Journal of Real Estate Finance and Economics, 2004, vol. 30, issue 2, 197-219

Abstract: In the U.S., households participate in two very different types of credit markets. Personal lending is characterized by continuous risk-based pricing in which lenders offer households a continuous distribution of borrowing possibilities based on estimates of their creditworthiness. This contrasts sharply with mortgage markets where lenders specialize in specific risk categories of borrowers and mortgage supply is stepwise linear. The contrast between continuous lending for personal loans and discrete lending by specialized lenders for mortgage credit has led to concerns regarding the efficiency and equity of mortgage lending. This paper sheds both theoretical and empirical light on the differences in the two credit markets. The theory section demonstrates why, in a perfectly competitive credit market where all lenders have the same underwriting technology, mortgage credit supply curves are stepwise linear and lenders specialize in prime or subprime lending. The empirical section then provides evidence that borrowers are being effectively sorted based on risk characteristics by the market. Copyright Springer Science + Business Media, Inc. 2004

Keywords: subprime; lending; mortgage; self-selection; market segmentation; credit; predatory lending (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (19)

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DOI: 10.1007/s11146-004-4879-8

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