Regime changes in sub-prime margins under the US housing bubble

Camilo Sarmiento

Applied Financial Economics, 2009, vol. 19, issue 3, 175-182

Abstract: Risk-based pricing is an alignment of loan risk pricing with expected loan risk - charging a higher interest rate for higher risk (Yezer, 2002). This article shows systematic relaxation of risk pricing for sub-prime loans during the US housing bubble, a period that extended from 2001 to 2006. For example, an identical loan, but having different vintages is shown to have significantly lower premiums in 2005 than in 2003. Strikingly, for a given credit risk, estimation results show a premium reduction of 60 basis points in sub-prime originations from 2003 to 2005.

Date: 2009
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DOI: 10.1080/09603100701857898

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