A Lucas Critique of Mortgage Lending: Theory, Evidence, and Implications

Brent C. Smith () and Anthony M. Yezer ()
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Brent C. Smith: Virginia Commonwealth University
Anthony M. Yezer: George Washington University

The Journal of Real Estate Finance and Economics, 2025, vol. 70, issue 4, No 2, 637-676

Abstract: Abstract Mortgage risk assessment is based on hazard models using data on “seasoned” mortgages, endorsed in previous years. These models assume that the lender’s pricing decision has no effect on the parameters of the hazard function. This paper argues that, when indicators of creditworthiness that can be influenced by applicants have a significant effect on credit cost, applicants behave strategically to influence the information disclosed to lenders. This gives rise to a Lucas Critique in which models generally perform well but occasionally fail because applicants are able and motivated to behave strategically.

Keywords: Mortgage pricing; Competing hazards; Default; Financial crisis; Signaling (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11146-023-09951-2

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