Equilibrium Subprime Lending

Igor Makarov and Guillaume Plantin ()
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Igor Makarov: MIT Sloan - Sloan School of Management - MIT - Massachusetts Institute of Technology
Guillaume Plantin: UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse, Tepper School of Business - CMU - Carnegie Mellon University [Pittsburgh]

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Abstract: This paper develops an equilibrium model of a subprime mortgage market. Our goal is to offer a benchmark with which the recent subprime boom and bust can be compared. The model is tractable and delivers plausible orders of magnitude for borrowing capacities, as well as default and trading intensities. We offer simple explanations for several phenomena in the subprime market, such as the prevalence of teaser rates and the clustering of defaults. In our model, both nondiversifiable and diversifiable income risks reduce debt capacities. Thus, debt capacities need not be higher when a larger fraction of income risk is diversifiable.

Keywords: Housing market; Subprime loans; Equilibrium (Economics); Mathematical models; Mortgage loans statistics; Adjustable rate mortgages; Mortgage rates; Subprime mortgages; Subprime interest rate; Mortgage underwriting; Default (Finance); Mortgage loans refinancing; Low-income consumers (search for similar items in EconPapers)
Date: 2013-06
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Citations: View citations in EconPapers (4)

Published in Journal of Finance, 2013, 68 (3), pp.849 - 879. ⟨10.1111/jofi.12022⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03399484

DOI: 10.1111/jofi.12022

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